Should publicly funded pensions start later?

[beowulf]

Dilbert is my role model. That explains a lot about me . Being Wally would be far worse. And I am a ham radio operator . But I am far too argumentative, contentious and non-conforming to lack free will .

[clifp]

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Originally Posted by kyounge1956 no, I didn't try to take that into account. Maybe I will see if I can re-create the spreadsheet tonight. Even without the spreadsheet, though, I think there is either something wrong with your math or I'm not understanding you. $25K x 8% is $2000, not $21K+. In any case, given the very large difference in both percentage and nominal dollars between pension at 52 (34.5% of base salary) and pension at 60 (60% of a larger base salary), I don't think the earnings of the non-paid pension would change the overall outcome. The earnings of the non-paid pension, plus the additional contributions of the employee who continues working until age 60, might tip the balance the other way. The 20-year employee who keeps working has a higher salary and larger contributions, than the new employee who would fill that slot if the long-time employee retired at 52. (Any effects of non-paid pensions and earnings from contributions would be slightly smaller than you have calculated, because this particular pension system uses an assumed return of 7.75%, not 8%. As I posted elsewhere—I think it was on one of my polls—I'm pretty sure this is nominal return, not real return.)

Remember it is the income the pension fund loses at 8% or 7.75% compounded at 8 years 60 to 52, plus the income from next years distributions compounded over 7 years etc. That is how I came up with the 21K+ in lost earnings. Now if we assume 0% percent earning than you are correct sometimes in the mid 80s the higher payments for a late retirement are more expensive than longer lower payments for early retirement.

For simplicity lets just consider taking a pension at 52 at 34.5% of base vs taking it at age 60 at 46% of base.

If we use the 7.75% assumed earnings rate my spreadsheet shows that a $25,000 pension started at age 52 will have cost the pension fund $332K+ in total distributions (200K) and lost income by age 60. The person who waited until age 60 will see a 33% increase pension to $33,333/year but with any reasonable interest the pension fund could easily pay the increase from the $332K that would have remained in the fund from the early retiree. In fact the difference in cost from the pension fund is huge at age 85 the early retiree cost the fund over $4 million in total distributions and lost income vs $870K for the pension taken at 60.

Now you are correct that having older worker retire to be replaced by younger lower paid employees maybe helpful to the overall city budget. However, from viewpoint of the pension fund early retirees are extraordinarily expensive.

[kyounge1956]

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Originally Posted by beowulf Quote: Originally Posted by Martha So you say. Of course, there is no evidence that there is free will. Well, you did voluntarily respond to my post . You didn't have to.

How do you know? Maybe Martha's reply wasn't freely willed but her inescapable destiny—the inexorable workings of FATE.

[kyounge1956]

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Originally Posted by clifp Remember it is the income the pension fund loses at 8% or 7.75% compounded at 8 years 60 to 52, plus the income from next years distributions compounded over 7 years etc. That is how I came up with the 21K+ in lost earnings. Now if we assume 0% percent earning than you are correct sometimes in the mid 80s the higher payments for a late retirement are more expensive than longer lower payments for early retirement. For simplicity lets just consider taking a pension at 52 at 34.5% of base vs taking it at age 60 at 46% of base. If we use the 7.75% assumed earnings rate my spreadsheet shows that a $25,000 pension started at age 52 will have cost the pension fund $332K+ in total distributions (200K) and lost income by age 60. The person who waited until age 60 will see a 33% increase pension to $33,333/year but with any reasonable interest the pension fund could easily pay the increase from the $332K that would have remained in the fund from the early retiree. In fact the difference in cost from the pension fund is huge at age 85 the early retiree cost the fund over $4 million in total distributions and lost income vs $870K for the pension taken at 60. Now you are correct that having older worker retire to be replaced by younger lower paid employees maybe helpful to the overall city budget. However, from viewpoint of the pension fund early retirees are extraordinarily expensive.

It doesn't seem possible to me that the difference between the two is that great, but we have gone past my depth of both math and spreadsheet-writing skills. There are three possible scenarios, one of which I think is not very likely to occur in actual practice:

1. Employee retires at age 52 and immediately begins to draw pension of 34.5% of base salary (assuming 23 years of service which is how many I had at age 52). Pension fund immediately starts to get contributions from the replacement employee, call it 8% of replacement worker's salary (although this will most likely increase to 10% over the next 2 years and stay at least 10% for the foreseeable future). In your spreadsheet, did you take the replacement employee's contributions into account? Just for "what if" purposes, maybe the replacement employee's contributions are about 1/5 of the retiree's pension benefit. (This is just a guesstimate—if the new hire's salary were the same as the retiree's, 8% of salary would be a little under 1/4 of the pension, but assuming the new hire is paid less to start off, their contributions would be a smaller fraction of the pension.)
2. Employee retires at age 52, but does not begin to draw pension until age 60. The benefit would then be 46% of the employee's base salary—the same base salary as scenario #1. Contributions from the replacement worker would start immediately, and for 8 years, neither the employee who left nor the replacement employee would be taking any money out of the fund, and the replacement employee's contributions would be producing an assumed return of 7.75%. I think this is the ideal scenario from the pension fund's viewpoint (and also those worrying about bailouts), but IMO it's very unlikely to happen (can't afford to quit without a replacement income). For those who do leave the City, it's possible for them to remove their accumulated contributions from the pension system altogether. The actuarial report had an estimate of how likely that is to happen. I don't recall the exact percentages, but it's less likely for an employee with 20+ years of service than for one with fewer. Is the loss due to some of these employees taking their money out of the fund greater or less than the savings from those who leave their money in but delay benefits? Heaven only knows!
3. Employee continues to work until age 60, then retires and begins to receive a pension immediately. This employee (if it's me anyway) will have over 30 years of service, and so be eligible for a pension benefit of 60% of base salary, and it will be a bigger base salary than it would have been 8 years ago, because of COLA increases. The replacement employee will immediately begin to make contributions to the pension fund, but these will probably be a smaller fraction of the retiree's pension than would have been the case in either of the first two scenarios. I don't know whether the replacement will make a higher starting salary under this scenario than the two earlier ones. It depends on whether entry level salaries go up too when current employees get a COLA increase, and I don't know if they do or not. In this scenario the pension fund gets to retain the not-paid pension and its earnings for 8 years, but after that must pay a much higher pension. I have two estimates from the retirement system: one at age 52, and one at age 57. Pension at age 57 was 1.56 times what I would have received at age 52, and that doesn't include COLA increases in my base salary between 52 and 57. At age 60, the difference would be even greater. The 8 years from 52 to 60 are about 1/4 of life expectancy for black women age 50 in 2006. So if the minimum age for benefits were increased, but employees simply continued to work until the new eligibility age, the fund would, in my case, be paying out somewhere between, say 1.75 and 2 times the benefit, but for only 3/4 as many years. The fund would also retain 8 years worth of my 52-year-old pension, plus its earnings.

I give up! I am sure the fund would pay out more under scenario #3 than #1, but whether the retained 8 years of non-paid pension would more than make up for it, I can't say. There are too many variables for me to get a grip on. I will just leave it at this: if the success of the OP's original suggestion depends on scenario #2 happening more frequently than #1 & #3, IMO the idea is a non-starter. If scenario #3 really does cost much less overall than #1, then the way to save the pension fund is to make it attractive for employees to stick around longer than 30 years—make the top benefit (say) 70% with 35 years of service or something along those lines.

[beowulf]

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Originally Posted by kyounge1956 How do you know? Maybe Martha's reply wasn't freely willed but her inescapable destiny—the inexorable workings of FATE.

It could all just be a coincidence, but there are no coincidences .

[FinanceDude]

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Originally Posted by beowulf Federal employees are far more educated than the average non-gov employee and many work in positions requiring security clearances and specialized skills.

Is that soapbox getting a little wobbly? Aren't USPS workers considered federal employees? I don't think a lot of them have a college degree........

[martyb]

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Originally Posted by FinanceDude Is that soapbox getting a little wobbly? Aren't USPS workers considered federal employees? I don't think a lot of them have a college degree........

I've been told by more than one USPS employee "hell no I'm not a Civil Servant, I'm a POSTAL EMPLOYEE!" They don't consider themselves in the same boat as ordinary federal employees, so I guess maybe they're not...

[FinanceDude]

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Originally Posted by martyb I've been told by more than one USPS employee "hell no I'm not a Civil Servant, I'm a POSTAL EMPLOYEE!" They don't consider themselves in the same boat as ordinary federal employees, so I guess maybe they're not...

It would appear they are:

USPS - Compensation and Benefits

[FinanceDude]

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Originally Posted by beowulf Dilbert is my role model. That explains a lot about me . Being Wally would be far worse. And I am a ham radio operator . But I am far too argumentative, contentious and non-conforming to lack free will .

My dad has been a ham radio operator for over 55 years.............

[martyb]

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Originally Posted by FinanceDude It would appear they are: USPS - Compensation and Benefits

Better not tell THEM that! You know they have a reputation....

[beowulf]

According to the NY Times, Oct, 2009 (gotta believe them), 49% of federal employees have college degrees as compared to 29% of the private workforce. Further, 20% of federal employees have graduate degrees, while the number is 13% for the private workforce.

Despite this educational advantage, the bulk of federal employees fall in the $25K to $75K salary range. Once you get over $150K, private workers outnumber federal employees by 2 to 1.

From the Times:

"Some oinking can definitely be heard out there in the labor market, but anyone willing to follow the numbers can tell that the biggest piggies are not those employed by the federal government."

As for some postal workers, I think the issue may be the "civil" part, especially around large mailing holidays.

[Texas Proud]

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Originally Posted by beowulf According to the NY Times, Oct, 2009 (gotta believe them), 49% of federal employees have college degrees as compared to 29% of the private workforce. Further, 20% of federal employees have graduate degrees, while the number is 13% for the private workforce. Despite this educational advantage, the bulk of federal employees fall in the $25K to $75K salary range. Once you get over $150K, private workers outnumber federal employees by 2 to 1. From the Times: "Some oinking can definitely be heard out there in the labor market, but anyone willing to follow the numbers can tell that the biggest piggies are not those employed by the federal government." As for some postal workers, I think the issue may be the "civil" part, especially around large mailing holidays.

Just curious.... does this include the military? post office?

[beowulf]

Don't know if it does. I have a feeling it does not include postal workers. Today's military is far more educated than soldiers of 40 years ago who fought in RVN. But I have no factual information as to whether either group is included.

[martyb]

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Originally Posted by Texas Proud Just curious.... does this include the military? post office?

I can tell you who it does include....me. My pay is around $65000. Also, most postal employees, unless in management, or work large amounts of overtime, earn less than I do. A more common USPS figure, for people working at the P.O. or delivering mail, would be in the $50k's. Some less.

I work for DoD, and my pay grade is GS-11. I'm only in the mid-range of my pay grade...it takes around 18 yrs to advance from step 1 to step 10 (top step) I've worked for the fed for 33 years, but was in a different pay system until I changed jobs. I chose to spend most of my career in a more blue collar type job, where my highest pay was $55k, until 2008, when I finally decided to transfer into my current position, which is no longer blue collar work.

For most of my career, I considered it more important that I really liked my job and where I lived, and that I didn't uproot my kids just to move around the country chasing promotions. Now that I'm close to retiring, and the kids are gone, I'm seeing how choices I made early on will have a negative effect on the size of my retirement check.

Since changing jobs, my pay is going up, but in order for me to get into the $75k or more range, I'd have to work more years than I really want to. I want to retire at 55, which is 2 yrs from now. So....I'll have to figure out how to make my approx. $45k fed retirement work. Once I hit 60, then my approx. $18k military reserve pension will begin.

[Texas Proud]

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Originally Posted by beowulf Don't know if it does. I have a feeling it does not include postal workers. Today's military is far more educated than soldiers of 40 years ago who fought in RVN. But I have no factual information as to whether either group is included.

I know that... but most non-coms do not have a degree... I think you have to have one to be an officer... and from what I read a LONG time ago you almost have to have a PHD to become a general or admiral....

[FinanceDude]

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Originally Posted by beowulf According to the NY Times, Oct, 2009 (gotta believe them), 49% of federal employees have college degrees as compared to 29% of the private workforce. Further, 20% of federal employees have graduate degrees, while the number is 13% for the private workforce. Despite this educational advantage, the bulk of federal employees fall in the $25K to $75K salary range. Once you get over $150K, private workers outnumber federal employees by 2 to 1. From the Times: "Some oinking can definitely be heard out there in the labor market, but anyone willing to follow the numbers can tell that the biggest piggies are not those employed by the federal government." As for some postal workers, I think the issue may be the "civil" part, especially around large mailing holidays.

I think averaging in the obscene salaries of CEOs of public companies skews that number significantly....how many generals are making $20,000,000 a year?

[av8er]

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Originally Posted by Texas Proud I know that... but most non-coms do not have a degree... I think you have to have one to be an officer... and from what I read a LONG time ago you almost have to have a PHD to become a general or admiral....

It kind of depends on the military speciality, to be honest...the vast majority of enlisted soldiers have high school diplomas, but I've seen some that have completed graduate degrees. In general, though, you're right in your assessment of the education levels of most enlisted soldiers (http://www.armyg1.army.mil/hr/docs/d...%20Profile.pdf --see the top of page 4 for education stats).

Commissioned officers in the Army are required to have an undergraduate degree these days, and roughly 40% have completed graduate degrees as well (see above website). I would say that the vast majority of graduate degrees end at Masters, though. GEN Petreaus has a PhD from Princeton, but he is more of the exception rather than the rule among the Army's senior leadership.

[martyb]

Quite a few of my enlisted compatriots in the Air Force had degrees, but I'm pretty sure they aren't in the majority. After I left active duty, and worked for the Air Force and the Air Force Reserves for another 24 years, I noticed that many of the enlisted reservists did have Bachelor's and Master's degrees. Of course, many of them worked in private industry & only were military once a month. I've known a surprising number of degreed enlisted.

[Nords]

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Originally Posted by Texas Proud Just curious.... does this include the military? post office?

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Originally Posted by beowulf Don't know if it does. I have a feeling it does not include postal workers. Today's military is far more educated than soldiers of 40 years ago who fought in RVN. But I have no factual information as to whether either group is included.

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Originally Posted by Texas Proud I know that... but most non-coms do not have a degree... I think you have to have one to be an officer... and from what I read a LONG time ago you almost have to have a PHD to become a general or admiral....

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Originally Posted by martyb Quite a few of my enlisted compatriots in the Air Force had degrees, but I'm pretty sure they aren't in the majority. After I left active duty, and worked for the Air Force and the Air Force Reserves for another 24 years, I noticed that many of the enlisted reservists did have Bachelor's and Master's degrees. Of course, many of them worked in private industry & only were military once a month. I've known a surprising number of degreed enlisted.

For a few years the Navy required a bachelor's degree to promote to E-8/9. Eventually that requirement was dropped, probably in favor of doing better leadership things with their time the command master chief leadership programs.

The all-volunteer force has done wonders for education levels. With the widespread funding of the GI Bill and Tuition Assistance, and online learning in just about every major, you'd be surprised how many enlisted have their degrees. It's considered almost essential to be well on the way to a sheepskin when applying for the Navy's Warrant Officer and Limited Duty Officer programs.

Most enlisted submariners rotate ashore after 4-5 years of sea duty, and they're frequently motivated to achieve a concrete goal before they leave the service their next sea tour. The cream of the crop can get stationed at a training command, where the staff runs (for lack of a better phrase) "college assembly lines". When the students go home at the end of the training day, the staff goes back into the classrooms-- 3-4 nights/week and even Saturdays. At many commands they don't even leave their workspace-- they have enough staff students for the local college to send the instructors to their facilities. Homework gets passed around, study groups are formed, Navy training equipment is "borrowed" for projects & demonstrations, and officers get dragged in to apply their college-tutoring skills to help with math & engineering courses. Even the officers will be able to knock out undergrad prereqs for their masters programs or jumpstart their MBAs.

I spent my final eight years at training commands, and the Navy's training HQ required those commands to keep track of who was going to college. Every year our department had 30-40 of the 50 instructors attending courses. Every year 8-10 of them would get their degrees, and a few would go on to their commissions. One exceptionally motivated nuke machinist's mate senior chief obtained his master's degree (and a few months later was selected for E-9) while a nuke electrician E-6 crammed both the back half of his bachelors and his MBA into the same shore duty. (He's now an O-4 Intel officer.) Two submariners grabbed their degrees and scammed their way into Air Force commissions. There was even one nuke electrician E-6 working on his PhD, but I retired before he finished his thesis and I haven't kept up with him.

The lieutenant that ran our nuke officer engineering review course obtained his MSEE (with TA funds) completely online from U of Washington. When he didn't get the love he wanted from the assignment officer he resigned and was promptly snapped up by an Oregon electrical-engineering company that turned him right back into UW's PhDEE program, on their nickel. One happy camper.

My spouse's meteorological/oceanography specialty required her to have master's degrees in those subjects, so we married shortly before she was ordered to Monterey's Naval Postgraduate School. My 2.75 years there cost me an additional obligation of nearly four years but it was the best damn duty I'd ever had. Every day I lived in fear that a submarine assignment officer would realize where I was, and one day it happened...

[Texas Proud]

Decided to take a look at the jobs in the big city near me.... and the salaries seem to be pretty good for a number of them....

Then I looked at the retirement program and was surprised to see that if I had 'known better' and taken a job with the city when I graduated I would be able to retire RIGHT NOW with 90% of my salary... (I am 52)...

Now, they reduced the plan since then, but it still seems that it is a bit high... If I worked just 5 years I can get 12.5% of my salary (but it only starts at 62)...