Taking on the Sacred Cows
Michael Bloomberg's refreshing and realistic look at retirement math
New York City Mayor Michael Bloomberg has bravely taken the high ground. He has challenged the "20 and out" mentality of public safety pension plans that allow police and fire employees to draw lifetime pension benefits when they are barely 40 years old, and expected to live beyond 80. If successful, this effort will help restore sanity and sustainability to public pension plans.
Bloomberg is a savvy, popular financial entrepreneur in his own right, and can see the handwriting on the wall in his city as well as others. Taxpayers cannot afford to support a retirement regime that allows workers to draw retirement benefits for twice as many years as they pay into the system. The math is implausible. In a very reasonable and modest proposal to reform the system, Bloomberg has suggested a 25-year service requirement and a minimum public safety retirement age of 50. That still allows hard-working and danger-facing heroes of the public safety professions to enjoy their golden years, and to be replaced by younger professionals whose bodies have not been beaten up by the forces of age.
The average American is living longer. As the mayor has rightly proclaimed, and as I suggested in my June 2008 column on retirement realities, we need to revise public retirement plans to establish realistic age and service requirements if taxpayers are to be able to afford to support these systems in the future. The problem is hardly unique to New York City. The folly of the "20 and out" formula is now beginning to receive national attention.
Retiree medical coverage is another benefit with equally outrageous formulas. Most egregious, perhaps, is a practice in certain California municipalities* to award full lifetime medical benefits to employees who retire at age 55 with just five years of service. That provides a 30-year benefit for five years of work, and in some notorious cases, the retirees' dependents are eligible for continuing coverage, which makes the payoff 50-to-5!
Here are some suggestions to help policy-makers and labor negotiators begin the process of restoring sanity to the numbers we use in these systems:
1. Link civilian retirement to Social Security's eligibility age. As shown in the tables in my previous column, the national retirement age is no longer 65, it is 66 for early Baby Boomers and 67 for those born after 1960. As a starting point for public pension plan design, these ages should be integrated into the retirement formulas, especially for workers with less than 25 years of service. Those who retire earlier should take an actuarial reduction.
2. Start retiree medical benefits at the Medicare age. Public employees should be encouraged to work until they are eligible for Medicare, presently age 65. This greatly reduces benefit costs because employees are then eligible for federal health benefits, leaving a smaller gap to fill at local taxpayer expense. For public safety employees who complete a full career (see #3 below), a "gap" program can be established that gives them partial coverage until they reach that age. The duration of these pre-Medicare payments can be limited in years or determined as a fraction of years worked. And for those with second careers or second jobs, the taxpayers should not be expected to bear the costs of health insurance when another employer should be. At the very least, the plans should invoke cost-sharing.
3. Redefine a full-service career. Taxpayers need not bear the full cost of a public employee's lifetime retirement benefits if the worker has not given a lifetime of service. Require 30 years of service for civilians, and 25 years of service for public safety. For those who terminate employment earlier, partial vesting can be permitted, to enable them to begin drawing a reduced benefit when they attain the normal Social Security age. The remainder of the employee's life was spent elsewhere, typically working for another employer who also had a responsibility to provide benefits. In fact, the current system invites double-dipping for retirement benefits. This rule can apply to retiree medical benefits as well, and would greatly reduce the actuarial costs for many public employers.
4. Require actuarial neutrality for early retirements. Many public pension plans give away the store to early dropouts. Actuaries can help the plan sponsor verify that reduction factors are correct for those who start drawing benefits before the plan's normal retirement age.
5. Require actuarial neutrality for dependent benefits. A retirement benefit for public employees should be based on the individual premium, not the family rate. If an employee wishes to leave a posthumous benefit for a spouse or dependents, then the plan should provide for an actuarial reduction of the family's benefit. In pension plans, this is fairly common, but too many retiree medical benefits plans pay full dependent coverage without any reduction factor. Again using public safety as an example, a young retiree who dies of unrelated causes can leave a benefits cost that runs as long as 60 years after his or her death. Why is this so-called "Trophy Spouse Survivor Syndrome" a taxpayer responsibility and not a matter of individual choice?
The list of potential reforms to retirement plans can be endless (including anti-spiking rules, restrictions on ad hoc COLAs, and prohibitions against retroactive benefits increases), but these pragmatic measures that focus just on retirement eligibility would effectively rebalance the cost of benefits with the ability and willingness of taxpayers nationwide to support deserving public servants in their golden years.
*Correction: The original version of this column referred to a "common" practice, which a reader felt could be misconstrued. The revised language pertaining to municipal practices is more accurately representative.
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