Published: Wednesday, April 27, 2011
Public pensions: a system that works for all
Pensions enable us to live out our older years in dignity. In the United States, an employer-provided retirement plan has long been considered an essential complement to Social Security and personal savings to ensure retirees have satisfactory incomes and certainty for household finances.
Since 1937, our state has developed a network of pension plans to enable financial security in retirement for its public servants. Now these pension plans cover all state and local public employees, including teachers, firefighters, police, social workers and natural resource and parks employees.
There are more than 300,000 public employees contributing to these pension plans and 130,000 retirees. All told, one out of every 14 Washington residents are in our public pension systems.
The typical public pension benefit is $18,182 a year. Here's how a typical pension is calculated: Let's say you are a groundskeeper, working for the state. You are 60 years old and have worked for 26 years. Your body is getting worn out by the physical labor and you are hoping and planning to retire in two years. What can you expect for a pension?
Start with 28 years, multiply by 2 percent to get 56 percent. Take your best five years and average them out. At the top of your current pay scale, you are looking at about $18 an hour. That's $37,000 a year. Fifty-six percent of this is a little less than $21,000. Because you retire at age 62, your benefit is reduced by multiplying by .724, to get $15,180. That's your annual pension. That's $1,265 a month.
Just as Social Security and the minimum wage have automatic adjustments to keep up with inflation, so do our state pensions. The typical retiree receives a cost-of-living adjustment tied to inflation, but it can't be more than 3 percent. So if inflation is below 3 percent, retirees are kept whole. But when it exceeds 3 percent, retirees lose purchasing power.
These pensions come out of trust funds administered by the State Investment Board. Contributions to these trust funds come from employees and their public employers. Currently public employees contribute between 3.14 percent and 8.46 percent of their wages to their respective public pension funds. Their employers -- state and local governments -- contribute similar amounts to these trust funds.
Washington is one of four states with at least 99 percent its pension obligations funded. The newer pension programs are funded at 118 percent of future liabilities. The older plans are also doing well. They faithfully pay out all benefits to retirees. In fact, their net assets increased in the past 12 months, to total more than $14 billion.
Our public pension system delivers $216 million a month to 130,000 retired employees. That comes out to almost $2.6 billion a year. Unlike corporations or the wealthy, pensioners tend to spend all their benefits and they spend these benefits where they live. As a result, each $1 in pension benefits results in $1.37 in increased economic activity in our state -- $3.6 billion in 2009.
Drilling down a bit more, because taxpayer contributions account for only 15 percent of total pension funds, each $1 in public contributions results in a $9.69 increase in economic activity.
In 2006, expenditures from pension benefits supported more than 21,000 jobs in our state. Retirees spend their pensions! They patronize their local stores, and in doing so, sustain the jobs of salespeople and merchants. Then these service workers spend their wages in other local businesses, and in doing so, also keep jobs in our state. This "multiplier" effect works best when purchases are made within the state. And that is where the vast majority of purchases are made by retired public servants. So they create jobs!
In that same year, the direct and indirect impacts of the expenditure of pension benefits resulted in increased state and local tax revenues of $149 million. That is, when people spend their money, they pay sales taxes and businesses pay the business and occupation tax. As a result, state and local governments in effect earn back 40 percent of their annual cost of pension benefits, through the mechanism of the benefits themselves and this economic multiplier effect.
Our public pension system works. Opponents of public services portray these pensions as too "robust." What these pensions provide is a modest middle class bulwark for retirees, and a quiet but crucial stimulus for jobs in our economy.
That's not robust, that is simply the way it should be.
John Burbank is executive director of the Economic Opportunity Institute. His email address is john@eoionline.org
Since 1937, our state has developed a network of pension plans to enable financial security in retirement for its public servants. Now these pension plans cover all state and local public employees, including teachers, firefighters, police, social workers and natural resource and parks employees.
There are more than 300,000 public employees contributing to these pension plans and 130,000 retirees. All told, one out of every 14 Washington residents are in our public pension systems.
The typical public pension benefit is $18,182 a year. Here's how a typical pension is calculated: Let's say you are a groundskeeper, working for the state. You are 60 years old and have worked for 26 years. Your body is getting worn out by the physical labor and you are hoping and planning to retire in two years. What can you expect for a pension?
Start with 28 years, multiply by 2 percent to get 56 percent. Take your best five years and average them out. At the top of your current pay scale, you are looking at about $18 an hour. That's $37,000 a year. Fifty-six percent of this is a little less than $21,000. Because you retire at age 62, your benefit is reduced by multiplying by .724, to get $15,180. That's your annual pension. That's $1,265 a month.
Just as Social Security and the minimum wage have automatic adjustments to keep up with inflation, so do our state pensions. The typical retiree receives a cost-of-living adjustment tied to inflation, but it can't be more than 3 percent. So if inflation is below 3 percent, retirees are kept whole. But when it exceeds 3 percent, retirees lose purchasing power.
These pensions come out of trust funds administered by the State Investment Board. Contributions to these trust funds come from employees and their public employers. Currently public employees contribute between 3.14 percent and 8.46 percent of their wages to their respective public pension funds. Their employers -- state and local governments -- contribute similar amounts to these trust funds.
Washington is one of four states with at least 99 percent its pension obligations funded. The newer pension programs are funded at 118 percent of future liabilities. The older plans are also doing well. They faithfully pay out all benefits to retirees. In fact, their net assets increased in the past 12 months, to total more than $14 billion.
Our public pension system delivers $216 million a month to 130,000 retired employees. That comes out to almost $2.6 billion a year. Unlike corporations or the wealthy, pensioners tend to spend all their benefits and they spend these benefits where they live. As a result, each $1 in pension benefits results in $1.37 in increased economic activity in our state -- $3.6 billion in 2009.
Drilling down a bit more, because taxpayer contributions account for only 15 percent of total pension funds, each $1 in public contributions results in a $9.69 increase in economic activity.
In 2006, expenditures from pension benefits supported more than 21,000 jobs in our state. Retirees spend their pensions! They patronize their local stores, and in doing so, sustain the jobs of salespeople and merchants. Then these service workers spend their wages in other local businesses, and in doing so, also keep jobs in our state. This "multiplier" effect works best when purchases are made within the state. And that is where the vast majority of purchases are made by retired public servants. So they create jobs!
In that same year, the direct and indirect impacts of the expenditure of pension benefits resulted in increased state and local tax revenues of $149 million. That is, when people spend their money, they pay sales taxes and businesses pay the business and occupation tax. As a result, state and local governments in effect earn back 40 percent of their annual cost of pension benefits, through the mechanism of the benefits themselves and this economic multiplier effect.
Our public pension system works. Opponents of public services portray these pensions as too "robust." What these pensions provide is a modest middle class bulwark for retirees, and a quiet but crucial stimulus for jobs in our economy.
That's not robust, that is simply the way it should be.
John Burbank is executive director of the Economic Opportunity Institute. His email address is john@eoionline.org
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