Pension article – Re-post from The PolicePay Journal

The Big Lie – Pensions Are Bankrupting Us

On October 26, 1997, the Florida Marlins won the World Series. Five days later, team owner H. Wayne Huizenga completely dismantled the team. The Marlins finished the 1998 season with 108 losses and the worst won/lost record in major league baseball for 1998. Huizenga said the team was too expensive. The payroll was $53 million in 1997 and fell to $13 million in 1998. Huizenga claimed that the team lost $40 million dollars in 1997, but we now know, based on the Zimbalist Report, that there was really a profit of $14 million dollars. Mr. Huizenga was showing some of the normal team income on the books of the stadium, which he also owned. This was legal, and his prerogative, but it did not show the true results for the team.

Since 1990, the per capita crime rate in the United States has declined 40%. This is one of the biggest success stories in our culture. This dramatic reduction occurred during the same period that the quality of police departments in the country were improved dramatically. Entry requirements were raised significantly. Training, both at entry and throughout an employee’s career became more stringent and longer in duration. Turn over rates among police officers became very low, with many officers staying with one police department until retirement. The average retirement age was reduced, resulting in a much younger and more fit force.

Many people claim that the reduction in crime is the result of economics and society’s reaching out to those who struggle to comply with cultural standards of conduct. Obviously, this has had some impact. However, if you work in jungle of the deviants, as police officers do, you quickly learn that the criminal element does not read the Wall Street Journal or react rationally to reasoning. Force and containment they understand.

Today, there are those who are calling for the dismantling of the winning team, under the banner of “we can no longer afford the payroll.” Just like Mr. Huizenga, the leaders of the attack on police officers are not taking into account all economic factors. Crime comes with a very high price tag, not just in tangible property, but human suffering too.

Who are these “reformers” who seek to curtail police compensation? For the most part, they are business and professional people who have more annual income than police officers. It would appear that they are not opposed to above average wages in general – just for those in occupations that do not meet some criteria that has yet been articulated.

Just like a good general, the leaders of this attack have identified the enemy’s weakest point in its line of defense – pension plans. Although attacking one individual component of compensation makes little sense, it has not deterred these self appoint gatekeepers of the local government wallet. Police and fire pensions have a real public image problem. A 90% pension at age 50 to 55 looks very generous to someone who gets Social Security and a meager 401K at 66 or 67. This is not the group that is advocating the curtailment, but the recipients of the message being broadcast by the reformers.

What is the case against the police and fire pension plans? There are three points:

1 – Too generous 

2 – Too early 

3 – Too expensive 

What objective benchmark or criteria was used to develop these three assertions? None, it is all “feel in my gut” rationale. It is much like the man who said he could not name any good art, but he knew it when he saw it. The opposition thinks they have “seen it.” Let’s examine each of the three claims.

Too Generous

Just on its face, this appears to be correct, but a comparison of annual income needed to retire at 55 and 67 shows a different perspective. At 67, most people have a paid for home and car and no children at home or in college. At 55, most people still have a mortgage and a car payment, along with children in college. I know, I will cover that next.

Too Early

If you do not care how old the police officer is that comes to your house when you are being robbed during the middle of the night, or how old the firefighter is that has to drag your children out of your burning house, then I would agree. Let them stay until 67, just like everyone else. I wonder why Joe Montana is not still in the NFL? I know what you are thinking “why don’t they get a second job until age 67?” So you are an accountant? Why don’t you quit at age 55 and get a job in an unrelated field – maybe mechanical engineering? After all, both occupations are mostly about numbers.

Too Expensive

One guy in San Francisco ask another how much he paid in rent this month for a small efficiency. The second guy answered $20,000. Wow, that is outrageous. Take This Apartment and Shove It! I Ain’t Livin’ Here No More. Oh, one other thing – the guy had not paid the rent for the previous nine months. The monthly rate is only $2,000. This is exactly what employers are doing today. They have paid little or nothing for many years and are now having to pay through the nose to bring the accounts current.

What does a 90% pension at age 55 add to payroll cost? The answer is about 24%. This would be for a plan that had a generous vesting rights. A 90% pension adds very little marginal cost for an employer when compared to one with no pension, that provides Social Security and a 5% 401K contribution.

Total Pension Contribution 24.0%

Less: Employee Contribution (8.0%)

Less: Social Security Contribution (6.2%)

Less: 401K Contribution (5.0%)

Net Marginal Cost 4.8%

Can’t believe your eyes? Let’s go through this line-by-line. We can provide the computations for the 24% total cost. Actually, 24% is a high number. Most employees contribute 8%. The Social Security savings of 6.2% is just the employer’s portion. The 401K contribution should be easy enough to understand. The employer has to contribute 16%, but it is offset by the elimination of the Social Security and 401K contributions.

Then why are some cities having to contribute up to 50% of payroll. One reason is that these cities failed to fully fund the plan in prior years. In effect, they have a mortgage payment to cover the funding shortages in prior years. Another reason is that the dumb accounting rules for pension liability assume that the plan is liquidated each year. When the pension is over-funded, the city contributes nothing. When the stock and real estate markets go into the tank, the city has to pay out the wazoo.


Re-posted from THE POLICEPAY JOURNAL 01/12/2012