California's Little Hoover Commission, which studies state government organization, sparked controversy with a recent report recommending sweeping changes in the state's public sector pensions. The thorough report is notable for more than its recommendations, however. It provides a history of the evolution of many of the state's retirement benefits and offers some eye-opening examples of how a general misunderstanding of the system often causes people to underestimate the true level of public worker benefits.
Consider, for instance, the way Social Security was added to the retirement portfolio of many California state workers, and how that has helped balloon their pensions in ways rarely discussed in policy debates in the state. As the report notes, the federal government originally created the system for private sector workers but in 1954 passed legislation to open it up to public employees because the federal government was looking to add more tax-paying workers to the system to bolster it. In California a debate broke out about whether state workers should be put into the system, with state officials agreeing that if they did so, they would have to pass a reduction in pension benefits to offset some of the new cost of now having to pay payroll taxes to the federal government for those workers now in the Social Security system.
Consider, for instance, the way Social Security was added to the retirement portfolio of many California state workers, and how that has helped balloon their pensions in ways rarely discussed in policy debates in the state. As the report notes, the federal government originally created the system for private sector workers but in 1954 passed legislation to open it up to public employees because the federal government was looking to add more tax-paying workers to the system to bolster it. In California a debate broke out about whether state workers should be put into the system, with state officials agreeing that if they did so, they would have to pass a reduction in pension benefits to offset some of the new cost of now having to pay payroll taxes to the federal government for those workers now in the Social Security system.
Gov. Edmund 'Pat' Brown signed compromise legislation in 1961 which added Social Security to state worker retirement benefits, but the bill also cut state pension benefits by using a complex formula based on the maximum income taxed by the federal system. At the time the formula determined that the average final compensation of a state worker used to determine his pension benefit would be reduced by $133.33 per month because of the added benefit of Social Security. But instead of adding the formula to calculate that number into the legislation, the bill included the actual figure, $133.33.
The result over time has been a huge windfall for state employees because both Social Security benefits and the maximum income taxed by the system have grown enormously. The Little Hoover Commission calculates that a high-earning state employee in 1961 would have seen 24 percent of his retirement income reduced because of Social Security benefits. Today, for the same worker, the reduction is just 2 percent, which is one reason why some retired state workers in California actually take home more than 100 percent of their final working salaries even without embracing techniques like salary spiking to raise their pay in their final years.
Few people understand the extent to which Social Security burnishes pensions for California state workers. In 1999, when CalPERS, the state employee pension system, was lobbying for enhanced benefits that eventually eliminated pension reforms put in place in 1991, CalPERS argued the 1991 law left some state workers at 'near poverty' levels in retirement. But, as the Little Hoover Commission notes, "CalPERS did not mention that those workers receive Social Security benefits that replace an additional 25 percent or more of pre-retirement income." The 1999 CalPERS benefits enhancements passed easily.
Among its many recommendations, Little Hoover is urging that the offset formula for Social Security be adjusted to create a more realistic and affordable offset of pension costs for the state.
The result over time has been a huge windfall for state employees because both Social Security benefits and the maximum income taxed by the system have grown enormously. The Little Hoover Commission calculates that a high-earning state employee in 1961 would have seen 24 percent of his retirement income reduced because of Social Security benefits. Today, for the same worker, the reduction is just 2 percent, which is one reason why some retired state workers in California actually take home more than 100 percent of their final working salaries even without embracing techniques like salary spiking to raise their pay in their final years.
Few people understand the extent to which Social Security burnishes pensions for California state workers. In 1999, when CalPERS, the state employee pension system, was lobbying for enhanced benefits that eventually eliminated pension reforms put in place in 1991, CalPERS argued the 1991 law left some state workers at 'near poverty' levels in retirement. But, as the Little Hoover Commission notes, "CalPERS did not mention that those workers receive Social Security benefits that replace an additional 25 percent or more of pre-retirement income." The 1999 CalPERS benefits enhancements passed easily.
Among its many recommendations, Little Hoover is urging that the offset formula for Social Security be adjusted to create a more realistic and affordable offset of pension costs for the state.
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