It seem me the only difference between what I specified is pay is calculated at the highest five consecutive years, which I agree is a better system.Given pay raises over the last decade of say 3%. The difference between pension benefit and say the final year is only 6% not huge amount. (snip)
Do you mean 3% raises, or 3% inflation adjustment? An average of 3% COLA over the last ten years might well be correct, but if you mean the purchasing power of public employees' pay goes up 3% a year, I don't know if that's a valid across-the-board assumption. I know it doesn't apply to my salary. I don't remember the last time I got an actual raise. This is not a complaint; it was my own choice not to seek a higher job title than the one I have now. (In fact, several years ago I took a voluntary downgrade, which resulted in a significant pay cut, but that's another story.) In my city at least, without moving to a higher job title, raises stop after 5 years in a position, and after that it is COLA only.
I'm not sure what you mean about the difference between pension and final year, but again, I question whether it's a valid assumption that the typical public employee's pension will be 94% of their final salary (if that's what you meant by a 6% difference). The maximum pension benefit in my retirement system is 60% of the average of 3 highest years' salary, regular hours only (IOW you can't "spike" your pension by working a lot of overtime). There is an exception for some employees. I've never understood exactly who qualifies or what the exact parameters are--it's something to do with whether an ordinary annuity for the amount of the employee's accumulated contributions & interest would pay more than the pension benefit under the ordinary calculation. But in practical terms you have to work well into your sixties plus have well over 30 years of service to get a pension payment more than 60% (i.e. 2% per year of service for 30 years). Your benefit will certainly not exceed 60% as an
early retiree. Again, I am not complaining about this, but rather, questioning whether the assumptions underlying the comparison of public and private used in cliffp's calculation are typical of a broad range of public pension systems.
My rule of thumb is that for the full pension plan where the employee contributes X% and the employer contributes y% of the employees salary, X+Y needs to be about 25% for 2%*years of service benefit. Typically what I have seen in public pension plans is that X is between 6-8% and Y is between 8-12%. Leaving a shortfall of 5-10%
I arrived at this rule of thumb, by assuming private sector worker contributed X and his employer Y in a 401k, his salary increased faster than inflation (merit/experience pay) . At retirement age, the lump sum was converted to a annuity, with a capped COLA increase, and with 50% survivor benefit for the same age spouse.
(I should add I invite others to check my calculation, which were performed under different under economic conditions. Relatively small changes in investment rates, inflation, and merit/experience pay calculation can make a big difference)
I haven't checked the calculation, because I'm skeptical that the assumptions about public pensions on which it is based. But I can tell you that in my pension system, until last year X=Y, that is the employee and employer contributions were equal. Up until three years ago (or maybe it was four), X+Y was just over 16%, which is in the range you assume for total contributions, and given our system's current condition, this is at least 5% less total contributions than required to bring the funding level to 100% within 30 years, according to a recent actuarial evaluation. But there's only a shortfall because we got hit so hard in the stock market crash. IIRC before that the actuaries said the contributions were adequate at the then combined total of 16.06% of salary. Contributions went up to just over 9% each from employee and employer in 2010 and just over 10% each last year. Because the pension system is significantly underfunded, the City increased its contribution last year to (IIRC) 11.25%. The employee contribution remained at 10.03%, which is the maximum allowed under our current contract. The rate used to calculate imputed interest on contributions was also changed from a fixed rate to one that changes with the rate on Treasuries. I wouldn't be surprised (or opposed) to see both sides of the contribution rise under the next contract. Meanwhile, as many other government entities have already done, Seattle is contemplating changing the pension offered to new hires to something considerably less generous than the current system. Since I've been telecommuting I haven't kept up with the details of any new proposal. Any such change would also, I think, have to be accepted by the union before it could be put into effect.
As Ziggy nicely summarized this systematic underfunding of pension plans by 5-10% was always a problem, but since the economic crisis it has become a monster problem. There is no good solution to it.
Seattle's pension fund was ticking along pretty nicely until 2008, but lost over a quarter of its total assets in the stock market downturn and is now scarily underfunded with a largely baby-boomer workforce and, I suspect, more than a few employees who retired immediately after being laid off.
It wasn't systematic underfunding that put us in our current bind, it was the debacle on Wall Street, and there is no way for our system to recover its losses from the people who brought that fiasco to pass. Alas, there is no good solution to being caught in an economic tsunami, any more than there is to deliberate underfunding, mismanagement of pension fund assets, over-optimistic return assumptions, or any of the other ways pension funds can get into trouble.