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Pension Problems



November 20, 2010 – Comments (15)

Being under employed taught me the degree to which public pensions were obscene.  I don't think I could have had worse timing in terms what would normally have been considered good choices.  I was in school when the economy was booming and people were able to get jobs, and every career choice I made I seemed to have made at the beginning of a massive decline in employment in that sector.  I was new to banking when bank machines were introduced and basically it left the banking industry with very little opportunity.  I did a chemistry degree where they told me by the time I was 4th year my average class size would be 8-10 and it was 40-50, leaving about 5 times as many graduates competing for jobs right at the beginning of the recession in the early 90s. 

I did more homework on career then ever before when making my decision to go into education, which was promoting a teaching shortage by 2004-2006, only to find the researchers completely failed to take into consideration a declining birth rate at the same time the government introduced cuts that increased the student to teacher ratio by 10%.

So, there I was, unable to find a permanent classroom job because for 5 years teaching positions were elimated through attrition at the same time the province graduated 800 new teachers per year.  Most that went into teaching during that 5 year period could not even get onto a substitute teacher list and something like half left the profession without ever getting a job in education.  I have little trust for economic and employment research as a result of such a grossly incompetent call that there would be a teaching shortage in the period that half entering it left without every finding a job.  To me, it feels like the same story 3 times in my life, banking, industry and education, and everytime I was taking advice from those I believed knew what they were talking about.

Anyway, in the year or two prior to my move to the north I did an economic analysis of the wage and pension loss from under employment.  Education has the most harsh pay grid to get through out of any occupation I have looked at.  For example, firemen and teachers have a 10 year grid, well, actually in education it goes to 12 years in many places.  With firemen by the end of the 4th year they are only $1000 below the maximum pay and they spend 6 years there before getting that last $1000.  With teachers the pay starts around 60-65% of the max and increases by about 3% of the max per year until it gets to 100% around year 12.  So, at the 4th year if the top of the grid is $70k, which is close to the same as what the fireman's top of the grid is, the fireman is $1000 less then max and the teacher is still $20k below the max.  So there is absolutely no comparison to what the actual wages are when you compare top salaries in occupations because the teacher's pay grid actually results in wages being about 10% less then what people believe them to be, compared to about a 2% average for all other pay grids.  

So, this is what my economic analysis was showing, but I also worked out lost penions.  My analysis showed that lost wages through not getting steps up the grid and losing pension was something like $50k per year being under employed and around half of it was lost pension accumulation.  A figure of a quarter million for pension sticks out in my mine, or something obscene like that.

So, that was just prior to me taking a close look at what was happening to government budgets and the economy as a whole.  It made me realize that there was no way in the world that pension obligations could be met.  I think that every last person who isn't on the receiving end of one of those sugar coated pensions has feelings of being ripped off by them.  We all tend to work hard and there is a gross inequity in terms of the financial recognition for individual's contributions.  I wasn't on the receiving end, and now I am.  I would much rather fix it to be fair, equitable and sustainable then continuing to live in wonderland.

The not being on the receiving end completely shaped my approach to financial matters.  I had to plan for my future and it meant doing without a lot compared to those on the recieving end, like new cars, more vacations, even starting a family.  When you know your budget must put something aside for retirement, well, it takes a deep cut into spending.  But not having a pension is also responsible for being on a sound financial path now.  I am not dependent on being on the receiving end of an unsustainable pensions because I started planning for my retirement 20 years ago.

I notice Rosey had a blog attacking unions for not taking pay cuts or benefit cuts.  I don't see estimates of how those budget woes continue as pension costs take a bigger and bigger cut of budgets as the aging population retires, but that is what the pensions are doing.  I think the wages are actually sustainable without the pension and benefit burden and the pensions kill transparency of the budgets because so much cost is in the future.

Governments truly need to separate themselves from this future burden and transfer what is owed up front and leave it for those making the unsound calcuations to deal with.

15 Comments – Post Your Own

#1) On November 20, 2010 at 3:30 PM, BillyTG (28.94) wrote:

"The principle of spending money to be paid by future generations, under the name of funding, is but swindling futurity on a large scale."---Thomas Jefferson

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#2) On November 20, 2010 at 8:02 PM, RockOYates (58.14) wrote:

Your honesty is to be applauded. Your ability to see what others in your position do not see . . . or want to see . . . says you have the guts to seek out and face the truth. You are a good person.

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#3) On November 20, 2010 at 11:25 PM, dwot (29.67) wrote:

Having said that I figure I can provide for my retirement, or at least I am on a path towards it, stories like this one, a 78-year-old retired couple returning to the workforce, concern me. 

I constantly encourage friends who are thinking about retiring early to consider working a bit longer as you can't predict what your finances will look like 10 or 20 years from now. 

The other thing is Canada now has an increased pension rate if you delay starting your Canada pension.  I believe each year you put off you get 6-7% more.  Today what people put into the Canada Pension actually makes it fairly sustainable.  You put 5% of wages and the employer matches it with another 5%.  The max contribution to the plan is about $4300 per person and the maximum benefit is about $13,500 per year, so about 3.1 years of contributions pays one year of pension and that is when collecting starts at age 65 and it looks at 47 working years, from 18 to 65, in calculating how much you get.  You are allowed to drop your 7 worst earning years, like say you were in university.

These executive class government pensions have people pay in about 5 to 7.5% with employer matching it.  So, look at the higher contribution rate, it is then expected to pay out 70% of wages, so about 4.7 years of contributions to pay for one year and if only paying in at 5%, well then 7 years of contributions to pay for one year, and some qualify for this at age 60.  Most qualify for the maximum pension after 35 years. 

 It would taking working 140 years to actually pay for 20 years of a 70% pension where you only contribute 5% of your pay and the employer matches it with 5%, which is about what you need if one retires at 60.  Waiting until age 65 you only need 105 years to pay for the pension.

 Canada has some great changes coming to CPP.  They make sense and actually pay for themselves.

The following changes to the CPP will be phased in gradually between 2011 and 2016, with the first major change occurring in January 2011 for people retiring after age 65:

The monthly CPP retirement pension amount will increase by a higher percentage if taken after age 65.The monthly CPP retirement pension amount will decrease by a larger percentage if taken before age 65.A longer period of low earnings will be automatically dropped from the calculation of the CPP retirement pension.Contributors will be able to receive their CPP retirement pension without any work interruption.If you are under 65 and you work while receiving your CPP retirement pension, you and your employer will have to continue making CPP contributions. (or if you work outside of Quebec while receiving a QPP retirement pension) These contributions will increase your CPP benefits.If you are between the ages of 65 and 70 and you work while receiving your CPP retirement pension, you can choose to continue making CPP contributions. (or if you work outside of Quebec while receiving a QPP retirement pension)These contributions will increase your CPP benefits.


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#4) On November 21, 2010 at 12:10 AM, tomlongrpv (64.22) wrote:

Are you aware that most public pensions in the USA are substitutes for Social Security?  And are you aware that most are better funded than Social Security?

It's popular now to dislike government and government employees and to believe that public pensions are "obscene," but it helps to understand the facts, even if just a little.

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#5) On November 21, 2010 at 7:57 AM, devoish (86.34) wrote:

In the year 2007, the employer must withhold Social Security taxes of 6.2% of each employee’s first $97,500 of wages. The employer then matches that amount. This means the employer must remit 12.4% of each employee’s wages that are not in excess of $97,500 in the year 2007. The result is a maximum withholding from an employee in 2007 of $6,045; a maximum matching by the employer of $6,045; and a maximum remittance to the federal government of $12,090.

The contributions are slightly higher now, because the payroll cap is $105,000 instead of $97,000.

The maximum SSI payout in 2011 is $8100 for an individual, $12,132 for a married couple in the USA

People who have contributed less, get less.

So if SSI is "unsustainable" with a one year contribution to receive a one year benefit, that 1:1 ratio is more sustainable than Canada's 3:1 ratio.

Of course both of us used numbers for this years maximum contribution and this years maximum benefit. In the USA those people who did not contribute at a $100k income level in 1995 will not get the benefits of a $100k income level contribution either.

And of course, SSI also has the expense of being a financial safety net for injured/disabled people in the USA.

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#6) On November 21, 2010 at 2:43 PM, dwot (29.67) wrote:

I'd love to know the facts you are referring to tomlongrpv.  In response to your post I picked a city, random in my mind, Boston.  You can qualify for up to 80% of your wage, and that is obscene.  Here are the contribution rates,

There is a huge population going into retirement that seem to have only paid 5% per year for a pension that will pay up to 80%.  Paying 11% if there is an 11% employer matching contribution isn't grossly out of line, but there is no way it is adequately funded.   32 years qualifies you for 80% and expect that to be for about 15 years.  With the current funding formula it would actually take 54 years to pay for 80% for 15 years.  You actually need to pay about 15% and have a matching employer contribution of about 15% to pay for it.

Now I am going to argue that an employer contributing 15% of wages for a pension in itself is obscene.  Even an employer contribution of 11% is extreme.

I really like the way some benefit plans have gone in that people are getting benefit points which can be used for sick days, health care, dental, pension, life insurance, disability insurance and even traded for extra days off.  So, benefits are x% of wages and you decide how you want your benefits distributed.  I think they have a minimum that must go to pension.  It sure makes the total wage a lot more transparent.

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#7) On November 21, 2010 at 2:44 PM, dwot (29.67) wrote:

devoish, sounds like SSI is set up to be well funded, and that kind of thing isn't the executive class pensions I was referring to.

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#8) On November 21, 2010 at 9:05 PM, tomlongrpv (64.22) wrote:

dwot  Picking a city at "random" doesn't really help understand the problem or even evaluate if there is one.  Personally, each time I read the compensation plans of the executives for the companies I own shares in, it seems to me that I am seeing much more impact from those private pensions on my bottom line than I would ever see from public pensions.

CalPERS (the entity that provides many public pensions in California) has over 75% of its beneficiaries collecting $36,000 a year or less and many if not most are not eligible for social security.

Many public pensions are substitutes for Social Security.  Thus the relevant question is how they compare with a private employee's 401k plus that private employee's social security.  And one should also take into account a comparison of the salaries too.

The corporate fat cats have duped you into thinking that public employees are the ones taking money out of your pocket while they take much more.  Carly Fiorina and Meg Whitman alone took more than $100 million.  They are laughing at you so hard they can barely breathe.


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#9) On November 21, 2010 at 10:00 PM, dwot (29.67) wrote:

Corporate fat cats are taking money out of investors pockets and indirectly out of pension funds.  However, CalPERS pension plan is generous relative to wages and what people put in and it is unsustainable.  You work 40 years and you continue with 100% of your salary.  That is nuts.

$36,000 is 240% of minimum wage.  I have no idea why you picked that figure, but the bottom line on the pension is that compared to what people put into it, they are getting a windfall out at taxpayer's expense.  Pensions were supposed to be paid for by the people receiving them and this clearly isn't the case.

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#10) On November 21, 2010 at 11:16 PM, tomlongrpv (64.22) wrote:

Sorry dwot but you have no idea what you are talking about as to CalPERS.  And no, no one is "getting more out of it than what they paid into it."  The contributions are what funds the pensions and, despite investment losses, they are solvent and indeed recovering.  There has been no taxpaer bailout of CalPERS.

$3,000 a month is not an uncommon social security benefit.  And CalPERS requires lower contributions as a percent of payroll than social security.  $3,000 a month in my city in coastal California is also the income level at which one qualifies as "low income" to get waivers of fees--essentially it is a poverty level income.  Our cost of living here in California is a bit higher such that we don't think of 240% of miniumum wage as wealthy.  Please remember we pay more taxes to the federal government than we get back in benefits (no deficit here) in order to support everyone else so we need both higher incomes and higher pensions.

Your pensions and half your benefits are paid by taxpayers in California assuming you are living in some sorry ass red state.   I think they say "red state" because it is red with the life' blood it sucks out of the blue states.

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#11) On November 25, 2010 at 4:51 PM, peachberrytea (36.18) wrote:

I notice Rosey had a blog attacking unions for not taking pay cuts or benefit cuts. 

I completely agree that pensions should be reduced.. but unfortunately there is no incentive for the government to do that (why not just kick the can down the road). There is no incentive to unions to take pay cuts either

not sure this has been mentioned already (i didn't read all of the above)

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#12) On November 27, 2010 at 10:21 PM, dwot (29.67) wrote:

I strongly disagree tomlongrpv. 

An 18% increase in yoy state contributions may not be a bailout, but it certainly isn't balanced or fair to taxpayers.  The information used to make these pension agreements wasn't sustainable,or factually correct.  If the numbers do not add up in a static calculation, they do not work in an inflationary model either.

peachberrytea, I think the era of can kicking is coming to an end.

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#13) On November 27, 2010 at 10:41 PM, rd80 (96.82) wrote:

$3,000 a month is not an uncommon social security benefit.

Horse squeeze. 
"The maximum [monthly] benefit depends on the age a worker chooses to retire.  For a worker retiring at age 66 in 2010, the amount is $2,346.  This figure is based on earnings at the maximum taxable amount for every year after age 21."


That's the maximum payout and it required maxing out SS taxable income every year from age 21 to 66, a very uncommon scenario.
Your $3000/mo. Social Security payout not only isn't common, it isn't possible.


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#14) On November 29, 2010 at 2:48 PM, dwot (29.67) wrote:

The cost of university is set to rise even more because of pension obligations.

rd80, I agree, tomlongrpv does not use facts.  Indeed, I went to the caliper web site, copied information from there about getting pensions up to 100% of income and the very next comment was that I have no idea what I was talking about. 


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#15) On November 30, 2010 at 5:19 PM, TheFoolishEdge (< 20) wrote:

Good post.

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