Big Pensions, Badges, and Bugles

The number of California public worker retirees collecting pensions of more than $100,000 a year has quadrupled since 2005, Phillip Reese reports in the Sacramento Bee. Unfortunately, his story buries the lede. What's most significant is how many of those big pensions are going to those who wore badges and bugles. A lot of what is seen as a pension problem is really a problem of public safety pay.

Reese is reporting about the number of $100,000-a-year pensions only because the $100,000 pension has been transformed into a political symbol. The California Foundation for Fiscal Responsibility and other groups campaigning to eliminate or modify defined benefit pensions for public employees use $100,000 as a proxy for excess.

What does a pension of $100,000 a year mean? Well, it certainly tells us something about California’s pension system. But it tells us more about the overall pay for particular worker or group of them.

An annual pension is the product of three factors: years worked, a benefit factor (the percentage of wage credited for each year worked), and the salary against which the benefit factor is applied. (To simplify, we’ll leave aside the question of normal retirement age and the size of the reduction for early retirement.) In this equation, you’ll notice, only one of those variables—the benefit factor—is solely determined by the pension system.

If you are a Nobel Prize-winning physician who spends your career teaching at a University of California medical school, you will likely retire with a pension in excess of $100,000 even under a modest pension system with a low benefit factor. That’s because, as the top person in the world in your field, you can command a high salary in the market. You might even earn as much as the minimum for a rookie utility player in major league baseball ($414,500 in 2011). And when you retire, any reasonable retirement plan will deliver a benefit that reflects your lifetime earnings. Certainly few people would find anything excessive about a $100,000 pension in your case.

In other words, to assess $100,000 pensions, we have to know who is on the list and what put them there.

Not surprisingly, California’s list of big pensions is sprinkled with Nobel Prize winners, retired university presidents, and former city managers and other executives at the largest public organizations in the state. Their presence on the list is is mostly a function of the salaries they commanded in the marketplace while they were working.

But a lot of the $100,000 pensions (Reese says “big chunk” but doesn’t give an exact percentage) go to public safety retirees, most of whom worked for local government.

Why? Because California is off the scale when it comes to compensating people with badges and bugles. Police, firefighters, and prison guards come up big on all the variables in the pension equation. They have the most generous pension formula, which allows many of them to retire with 3 percent of salary for each year worked. And they have the highest pay in the country. California prison guards earn 50 percent more than the national average. California police and firefighters earn 33 percent and 22 percent more, respectively, than the national average.

The irony here is that politicians who talk about reforming pensions routinely exempt public safety workers. Meg Whitman, for example, proposed to leave safety employees out from her plan to shift public workers to 401(k) plans. Her plan would have meant less retirement security for teachers, who make up the single largest segment of public employees and whose current retirement benefits “are only modestly higher than the private sector,” according to a recent report from the California Foundation for Fiscal Responsibility, the pension reform group. But it would have left the $100,000 pension club open to police, firefighters, and prison guards.

People in uniform do hard and important work. But their work is not a third or more harder in California than it is elsewhere in the country. In the way it conducts its politics and structures its government, California has let public safety compensation get out of hand.

As Reese’s reporting underlines, that is why the the $100,000-pension club is growing so fast. No pension reform plan can be judged serious if it doesn’t bring that public safety compensation back to earth.