4 Myths About Public Pension Retirees

As pension reform debates continue, retiree advocates offer up a few common misconceptions about pensioners.
by | March 8, 2013
 

Think public retirees have it made? Not necessarily.

True, there have been plenty of headline-grabbing cases of public-sector retirees with seemingly over-generous pensions -- even some whose retirement pay outstrips what they made in their working days. But the fact is that most public retirees enjoy modest lifestyles.

Still, in the ongoing debate over reforming public pensions, retirees sometimes are portrayed as living high on the hog, a characterization employee advocates say is unfair -- and one that's clouding the issue.

Here, then, are a few of what retiree advocates say are the biggest myths about public pensions.

1. Retirement benefits make people rich.

Pension spiking has been a problem, to be sure. But most retirees' pay is decidedly modest.

The average federal pensioner receives about $32,000 per year, while state and local average payouts vary. Washington state’s average pension benefit, for example, is about $21,500 annually, according to the Washington Policy Center. New York state’s payouts to police and fire retirees average $42,259 annually. State and local employees in New York receive an average of $20,200 annually, according to the Office of the Comptroller.

None of those figures could be called extravagant, says Keith Brainard, research director for the National Association of State Retirement Administrators. Retirement security – not wealth building – is the name of the game for the typical public retiree. “There’s nothing wrong with wealth creation,” Brainard says, “but the first purpose of retirement benefits ought to be to make sure people have a roof over their head and food on the table.”

2. What a racket! Some retirees didn’t even have to contribute to their plans for their entire career!

Yep, it's true that some employees, particularly those hired in the boom years of the 1990s, didn't pay in to the system. And now some of those people are reaping pensions in retirement.

But it's more accurate to say that the setup was the result of a broken system rather than the result of freeloading employees. Many governments took a so-called “funding holiday” in the 1990s as pension funds swelled thanks to a rising market. (Of course, those states failed to acknowledge that bad years often follow good ones. As the economy stalled over the past decade, those contribution holidays aggravated the impact of market losses.)

The idea that employees somehow gamed the system is unfair, says Melissa Turner, an employee at the University of California at Davis who was hired during that time period. After all, individual employees don’t have control over how their retirement savings programs are run.

“I do understand that something needs to change, but you can’t put a freeze on everything for 10 years and then start expecting people to go, ‘Hey, yeah, I’ll pay for a service I already thought I was getting,'” she says, adding, “If they’d just left it the way it was, it would have been different.”

3. The biggest problem is that retirees are living longer.

True, they are. According to the U.S. Census Bureau, the nation's 90-and-older population nearly tripled over the past three decades, reaching 1.9 million in 2010. But increased life expectancy is only a piece of the demographics pie -- another piece is that people are having fewer children today. According to the Social Security Administration (another entity grappling with an aging population), the elderly population will reach 23 percent of the total U.S. population by 2080. That means that the 65-and-over population will have more than doubled as a percentage of the total population in roughly 100 years' time. Meanwhile, the working population is shrinking; it's on track to drop from 60 percent in 2005 to 54 percent in 2080. In short, fewer people will be paying in to pension systems while more people will be receiving their benefits.

Still, the bigger issue, as far as funding pensions goes, has to do with system mismanagement. In addition to the payment holidays during the booming '90s, states and localities were also keen on increasing pension benefits during that time. In California, for example, Gov. Gray Davis in 1999 signed into law a bill that granted billions of dollars in retroactive pension increases to state employees and allowed retirements as young as age 50 with lifetime pensions of up to 90 percent of their final year salaries. It took the state more than a decade to pass reform that essentially undid the 1999 law.

4. It's the economy! These issues were inevitable!

It's not that simple. One of the best-funded pension plans is actually in Illinois, a state that has become a poster child for underfunded pensions. The exception to Illinois’ inability to address its unfunded liability is the 90 percent-funded Illinois Municipal Retirement Fund (IMRF).

“We’re trying to distinguish ourselves from the headlines that typically occur in Illinois,” says Louis Kosiba, the fund’s executive director.

The key difference between IMRF and Illinois’ other major pension plans goes back to management: IMRF has the ability to enforce employers’ payments into the plan. The state of Illinois has been notorious for not putting its required annual payments into its pension plan in recent years, a big factor in its unfunded liability, which hovers just above 40 percent.

“It’s very easy for us to track if someone has fallen off bandwagon,” Kosiba says. “There is a culture here that you pay your required contribution.”

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