Lets run some Pension numbers

[utrecht]

I've run some numbers because I'm trying to figure out how much better of a deal a DB plan is over a DC plan. The salary numbers are approximate, but they are pretty close to what a 25 year police officer might make in my city depending on his rank.

Assumptions:

Officer makes $35K for 5 years, $45K for 5 years, $60K for 5 years, $70K for 5 years and then $80K for his last 5 years.

Officer contributes 8.5% of his salary. City contributes 27.5%

Officer invests his money and obtains an annualized return of 8.5% over the 25 years. (My pension fund has returned exactly 9.14% over that time frame but they assume 8.5% so that's what I used).

This comes out to a total of $1,450,000. At a 4% withdrawal rate from this DC plan, he would receive $58,000 per year.

If this person was in my pension fund, he would receive 3% per year times 25 years or 75% of the avg of his final 3 years of salary....or $60,000 per year.

I realize that the pension is a guaranteed income and that is pretty valuable, but in terms of dollars alone, they are almost the same. This tells me three things.

#1) These pension plans that are in trouble have either promised benefits that aren't possible based on the amount of money going in.

#2) These pension plans that are in trouble have squandered their money and are mismanaged.

#3) For the avg. Joe, other than the security of knowing your retirement income is guaranteed if you have a pension, its not as big of a deal as people think to have a DB over a DC plan if you are money savvy and can choose your own investments wisely from within your 401k.

PS..None of this accounts for the fact that with the DC plan, the money will be left to your heirs when you die. With the DB plan, my wife will get only half of my pension benefit, and when she dies, my heirs get nothing.

 

[leftbucket]

Ut-

First of all, I'm on your side. DB pensions are an excellent tool
when run properly. I'm in a firefighter plan myself that is in many
ways similar to yours.

Your assumptions and math are generally correct for the "average joe"
reader of this board, perhaps, who is motivated to save a high percentage of his or her income and be "money-savvy", but I can tell you that the average worker won't save 36% of their income or anything close, unless forced to do so. This itself is a major benefit of DB plans- forced savings
by the employee and the employer.

Another major benefit of DB plans that you hinted at near the end
is that when a worker either leaves employment early or dies, the money
stays in the system. This allows DB plans to pay annuities with much
less in reserves. 40-60% less money is required to fund a non-profit
annuity (pension) vs holding the money in savings on one's own (DC plan)and releasing it in SWR increments.

On a side note, I have researched many public plans and 8.5% expected
return is quite on the high side. You need to be slightly concerned.
Obviously, I don't know the specifics of your plan, it may be in a better
position than most to do this (different retiree COLA granting policies
or something), but if I were you, I'd investigate a little further.

-LB

 

[utrecht]

I wasn't trying to debate savings rates or anything like that. I know most people don't save enough. Personally, I save more than 36% of my salary even though I have a pension on top of it. What I'm saying is that over the past 20+ years that Ive been in this pension fund, Ive contributed 8.5% and my employer has contributed 27.5%. If my employer would've contributed the exact same amount of money into a DC plan instead of DB pension plan, there would not be much difference at all in the amount of retirement income that I ended up with.

Going forward who knows what will happen, but in this specific 20-25 year span, I would've come out ahead with a DC plan. I would've done better than 8.5% annualized return. I can say that with confidence because I know what my 457b returns were over that time frame and it is more than 8.5%.

Also, not only would the entire balance be mine to leave to my heirs as opposed to my heirs after my wife getting nothing with the pension, but there's also every chance that my large portfolio balance would rise over my retirement years faster that the rate of the semi COLA that I get with the pension, resulting in a considerably larger withdrawal amount than the pension check that I will be receiving.

I realize that the pension benefit is a stable amount no matter what the market does and in times like the past couple years that will bring great comfort, so believe me I'm not complaining in the least little bit. I'm just saying that if you only consider the monetary value, the DB plan isn't astronomically better than a DC plan as some people think.

 

[Sue J]

With the DB plan, my wife will get only half of my pension benefit, and when she dies, my heirs get nothing.

Is there an option for you to get a reduced payment and have your wife continue to get the same amount if you die first? We chose the 100% to survivor option on DH's pension. In his plan the spouse has to sign off if the retiree takes any other plan. If I die first his payment will increase to whatever his single option would have been.

 

[utrecht]

Is there an option for you to get a reduced payment and have your wife continue to get the same amount if you die first? We chose the 100% to survivor option on DH's pension. In his plan the spouse has to sign off if the retiree takes any other plan. If I die first his payment will increase to whatever his single option would have been.

Yes, I have an option like that available to me but as you said, I would have to accept a reduced pension benefit if I choose that option.

The point of this thread is that there are benefits to having a DC plan over a DB pension plan (assuming the contributions are the same in both cases).

If I have a pension that pays me $40,000 per year it would be similar to you having a 401K with $1,000,000 in that you could draw $40,000 per year. The difference is that I either have to accept only $30,000 per year (estimate) when I'm alive or my wife will get only $20,000 per year after I die. You can draw $40,000 and your spouse will still get the same $40,000 after you die.

 

[walkinwood]

Officer invests his money and obtains an annualized return of 8.5% over the 25 years...

Interesting analysis.

Did you use just the officer's contribution or did you include the city's contribution too?

 

[Emeritus]

Yes, I have an option like that available to me but as you said, I would have to accept a reduced pension benefit if I choose that option.

The point of this thread is that there are benefits to having a DC plan over a DB pension plan (assuming the contributions are the same in both cases).

If I have a pension that pays me $40,000 per year it would be similar to you having a 401K with $1,000,000 in that you could draw $40,000 per year. The difference is that I either have to accept only $30,000 per year (estimate) when I'm alive or my wife will get only $20,000 per year after I die. You can draw $40,000 and your spouse will still get the same $40,000 after you die.

sorry, there is a math error in your analysis
a lifetime pension is an annuity. It value depends on age but is not routinely 25 x the pension. The annuity value of the pension can be calculated on one or both lives.

a one million dollar retirement fund is worth more than a 40,000 pension to 65 year old but much less to a 40 year old

 

[utrecht]

sorry, there is a math error in your analysis
a lifetime pension is an annuity. It value depends on age but is not routinely 25 x the pension. The annuity value of the pension can be calculated on one or both lives.

a one million dollar retirement fund is worth more than a 40,000 pension to 65 year old but much less to a 40 year old

And to a 50-55 year old? I submit its pretty close to the same.

 

[REWahoo]

I am relieved to know we once again have an unimpeachable authority standing by to point out and correct even the most minute and obscure deviation from perfection in our posts. Life is good.

 

[utrecht]

Interesting analysis.

Did you use just the officer's contribution or did you include the city's contribution too?

Both of course. The point was since we know how much the employer is contributing, its pretty similar whether they put the money into a pension or just give it to the employee in a 401k

 

[clifp]

A couple of comments. First I have generally argued that in order to fund a pension that promises a benefit of 2-3% per year of service, the combined employee and employer contribution should be between 25-35% (this is much above the typical contribution of employee 8% and 8-12% employer). In Utrecht case the combined contribution is 36%. His plan also has had a good investment track record 9.14% over the last 25 years is I bet well above average for pension funds.

It is interesting that even with very large contributions and superior returns the fund is only marginally able support the promised benefits. If we take the $1,450,000 and with a 60K annual spend and put it into FIRECalc shows a 92% success rate for a 30 year retirement. However, IIRC the pension fund allows people to retire with sufficient years of service. So a Police officer with 25 year of service could easily be retiring in his late 40s or early 50s. So if we use a 40 year retirement the FIRECalc success rate drops to a still good but hardly terrific 81%.

Up until the current record low interest rates, a $1 million annuity for somebody in their 50s or 60s provides a significantly higher payment than $1 million in investment portfolio. However today that $1,450,000 would only buy an annuity that pays $3254/month for a 50 year old. You would need to be 62 in order to get the same $5000/month inflation protected pension for a $1,450,000 nest egg.

Still if I was a Dallas tax payer I won't lose a lot sleep about having to bail out Utrecht. Relatively speaking it seems quite well funded. On the other hand the City's contribution of 27.5% of an officers salary is pretty huge.

 

[haha]

Still if I was a Dallas tax payer I won't lose a lot sleep about having to bail out Utrecht. Relatively speaking it seems quite well funded. On the other hand the City's contribution of 27.5% of an officers salary is pretty huge.

Pay me now, or pay me later. After all, these guys carry guns.

 

[clifp]

Yup and can throw in jail. I must say that giving cops a good pension beats Mexico's and many other countries approach to paying law enforcement, allowing them to extort money.

 

[leftbucket]

Pension Gaps Loom Larger - WSJ.com

Don't know if the article's viewable in entirety; I just thought it might be of benefit
in the future to know that 8.5% is currently at the very top of the public pension
expected return rate.

Like Clifp said though, I wouldn't lose too much sleep over it.
Your plan in Dallas is in better shape than many others.
I have actually met some of your trustees at an NCPERS conference and
they seemed like pretty dedicated folks.

As for the 27.5% city contribution, it should be noted that Dallas Police/Fire
does not participate in SS (correct me if I'm out of date, utrecht) , so from an employer perspective, 6% was being spent anyway.

-LB

 

[leftbucket]

WCV-

Somehow I knew something like that was coming.

There's been a few threads lately where pension envy has reared its ugly head. I notice most of the long time posters steer away from these
discussions probably because they're tired of them, but I'm still relatively
new and ignorant so I'll jump in.

Everybody, here is my preholiday "anti-pension envy" tactic.
Years ago, I use to get hit with this junk at Thanksgiving and Christmas.
It all started when an uncle (then in his 50's) ran into an old buddy at a
high school reunion who had got a public pension in his 40's.
For years after that I always started to catch the brunt of
his whining. This spread to a couple other members of the family, too.

So, I started investigating public sector pensionable jobs for
them to put in for. I even offered to apply for them.

In one case, I actually hand delivered an application for my brother for a job with a public pension. He got the job offer! then turned it down!
He can't even think about complaining about pensions in front of me now!

When treated at an individual job for job level, the anti-public pension
arguments break down.

Furthermore, comparing most public pensions to SS is a weak argument,
and complaining about it on this board is certainly a waste of time.

 

[kyounge1956]

(snip)Still if I was a Dallas tax payer I won't lose a lot sleep about having to bail out Utrecht. Relatively speaking it seems quite well funded. On the other hand the City's contribution of 27.5% of an officers salary is pretty huge.

I noticed that too. Actuaries are recommending an increase in contribution level to about 25% overall to put Seattle's retirement system back in the black, which I have been thinking is as about as high as it would be practically possible to go. How long has the Dallas system's contribution level been at 36%? Do Dallas police participate in the Social Security system?

 

[utrecht]

I noticed that too. Actuaries are recommending an increase in contribution level to about 25% overall to put Seattle's retirement system back in the black, which I have been thinking is as about as high as it would be practically possible to go. How long has the Dallas system's contribution level been at 36%? Do Dallas police participate in the Social Security system?

The 36% includes the employees 8.5%. The City contributes 27.5%. We don't participate in SS.

I realize that 27.5% seems high, but our salary is also 10-15% lower than most every suburb in the area. In fact we have the lowest starting salary of the 36 largest police departments in North Texas (along with the most dangerous city to work in). They could cut their contributions back to 12% and give me a 15.5% raise and I would be happy as a clam because I would invest every penny of the raise. It would work out just about the same retirement wise and people would be less likely to complain about our oversized benefits.

One last note: The Non Police and Fire employees of Dallas have a totally separate pension with lower contributions on both parts and lower benefits as well.

 

[leftbucket]

WCV-

So you're going to lecture me about elitism from your
perch overseas? You don't care at all about this issue,
you just want to complain.

Please, stop wasting everyone's time.

-LB

 

[haha]

WCV-

So you're going to lecture me about elitism from your
perch overseas? You don't care at all about this issue,
you just want to complain.

Please, stop wasting everyone's time.

-LB

Please, be a little more modest and speak for yourself.

 

[kyounge1956]

The 36% includes the employees 8.5%. The City contributes 27.5%. We don't participate in SS.

I realize that 27.5% seems high, but our salary is also 10-15% lower than most every suburb in the area. In fact we have the lowest starting salary of the 36 largest police departments in North Texas (along with the most dangerous city to work in). They could cut their contributions back to 12% and give me a 15.5% raise and I would be happy as a clam because I would invest every penny of the raise. It would work out just about the same retirement wise and people would be less likely to complain about our oversized benefits.

One last note: The Non Police and Fire employees of Dallas have a totally separate pension with lower contributions on both parts and lower benefits as well.

No criticism intended, I just want to make sure I am comparing apples with apples. City of Seattle employees do participate in SS, so if pension fund contributions are raised per the actuaries' recommendation I think that would actually make the overall percentage of payroll going to retirement higher in Seattle.

 

[leftbucket]

Please, be a little more modest and speak for yourself.

Ha-

I respect your input. However,

WCV's post was unnecessarily inflammatory and accusatory,
very confusing, not relevant, and poorly edited. (Does he really want workers to "bare" the expense)

If anyone else can argue merit for his comment, I'll retract my
statement. Until then...

 

[leftbucket]

My taxes on U.S. investments (where all my savings and investments are located) and work are more than most salaries and I pay into SS so I am a concerned tax payer. I would rather have my taxes go to a system with more and better services and servants than an expensive elitist system for the few that are to good to use what is forced on the majority and payers of their system.

So you're somewhere overseas and you want "more and better
services and servants" for policing in Dallas, Texas? He just explained the 27.5% that you seem so concerned about.

Please stop wasting __________'s time.

 

[wcv56]

sorry about the comments but I never heard of someone getting such % put into a retirement system by an employer.

 

[ERD50]

I realize that 27.5% seems high, but our salary is also 10-15% lower than most every suburb in the area. In fact we have the lowest starting salary of the 36 largest police departments in North Texas (along with the most dangerous city to work in). They could cut their contributions back to 12% and give me a 15.5% raise and I would be happy as a clam because I would invest every penny of the raise.

That really helps put things in perspective. If we truly have a "pay as you go" pension system as so many of us are calling for, it really doesn't make much difference if it is 'provided' or if the worker does it himself. Though a group can average out longevity risk. And of course, some people just wouldn't do it.

-ERD50

 

[akck]

One thing that may be missing from your comparison is retirement healthcare. Many plans provide healthcare as part of the benefit, so you can't assume all of the city's portion would be available for you to invest.