Reading the Washington Post's story earlier this week on the bleak retirement outlook for younger workers, you would think that new government workers starting in places like Rhode Island, which recently enacted pension reform, face the same kind of dim outlook as struggling private workers. The story notes that not only are many private companies transforming their pension systems into cheaper models to reduce the costs, but that states are doing something similar. Yet the story glosses over the fact that these new state pension systems are still generous compared to the private sector, even though they are less generous than what state workers have been receiving. Consider the example of Rhode Island.
The Ocean State's new pension system pushes back retirement for state and local workers to the Social Security retirement age, in other words, more in line with private sector workers. The hybrid plan includes a modest defined benefit pension in which a participant's years of working for government are multiplied by 1 in order to determine what percentage of his final average salary he'll receive as a pension.
On top of that, the employee gets a defined contribution plan in which he and his employer, that is, the government, contribute a combined pre-tax total of 6 percent of wages into an account to provide the worker with a pot of money which he can invest and then use to supplement his retirement. And workers are now enrolled in Social Security, too.
What does all of this mean in terms of real money? Well, let's take someone who starts in Rhode Island as a teacher today at the average state starting salary, according to the National Education Association, of $56,600. If that teacher works for 35 years and receives an annual salary increase of 2.5 percent (the average in Rhode Island for teachers in the last 10 years), the teacher would finish with an average final five year salary of nearly $127,000. Based on a multiplier of 1 times 35 years, the teacher's defined benefit pension would be about $44,500.
At the same time, the teacher and his school district would combined be contributing the equivalent of 6 percent of salary into a defined contribution, or 401(k) style program. If the teacher invested that conservatively and received an annual return of only 4 percent, after 35 years the account would hold about $361,000. Even at today's ridiculously low interest rates, if the teacher purchased an annuity with that money when he retired, it would provide him with another $22,000 annually.
That's a final pension benefit equal to nearly half of ending salary, plus Social Security benefits, whatever they may be. Or if the teacher opts out of Social Security (it's not mandatory for government workers, as it is for private employees) contributions to the defined contribution account would be higher every year by 4 percent.)
Yes, this is not a pension anything like what teachers in Rhode Island, or many other places, have been achieving. It requires working to full Social Security retirement age (by contrast, the average retirement age of a public school teacher in America is now 59 years old). And it replaces "only" half of income plus Social Security (today that Social Security benefit would be about $20,000 annually). The pension reform also ends techniques that employees could use to spike their retirement pay and caps the maximum pension people can achieve.
But it is hardly a "bleak" retirement scenario for a new Rhode Island government worker. I would argue that most private workers starting out today would sign up for that pension plan right now. "Bleak" is really a term that's more properly applied only to the private workers described in the piece.
On top of that, the employee gets a defined contribution plan in which he and his employer, that is, the government, contribute a combined pre-tax total of 6 percent of wages into an account to provide the worker with a pot of money which he can invest and then use to supplement his retirement. And workers are now enrolled in Social Security, too.
What does all of this mean in terms of real money? Well, let's take someone who starts in Rhode Island as a teacher today at the average state starting salary, according to the National Education Association, of $56,600. If that teacher works for 35 years and receives an annual salary increase of 2.5 percent (the average in Rhode Island for teachers in the last 10 years), the teacher would finish with an average final five year salary of nearly $127,000. Based on a multiplier of 1 times 35 years, the teacher's defined benefit pension would be about $44,500.
At the same time, the teacher and his school district would combined be contributing the equivalent of 6 percent of salary into a defined contribution, or 401(k) style program. If the teacher invested that conservatively and received an annual return of only 4 percent, after 35 years the account would hold about $361,000. Even at today's ridiculously low interest rates, if the teacher purchased an annuity with that money when he retired, it would provide him with another $22,000 annually.
That's a final pension benefit equal to nearly half of ending salary, plus Social Security benefits, whatever they may be. Or if the teacher opts out of Social Security (it's not mandatory for government workers, as it is for private employees) contributions to the defined contribution account would be higher every year by 4 percent.)
Yes, this is not a pension anything like what teachers in Rhode Island, or many other places, have been achieving. It requires working to full Social Security retirement age (by contrast, the average retirement age of a public school teacher in America is now 59 years old). And it replaces "only" half of income plus Social Security (today that Social Security benefit would be about $20,000 annually). The pension reform also ends techniques that employees could use to spike their retirement pay and caps the maximum pension people can achieve.
But it is hardly a "bleak" retirement scenario for a new Rhode Island government worker. I would argue that most private workers starting out today would sign up for that pension plan right now. "Bleak" is really a term that's more properly applied only to the private workers described in the piece.
Thank you for clarifying that for the masses.
Actually, with Public Sector "cash pay" no less than their Private Sector counterparts (per the US Gov't BLS) and with EQUAL "Total Compensation" (cash pay , pensions, and benefits) as an appropriate goal, there is no justification whatsoever for ANY (yes ANY) greater Taxpayer-funded Public Sector pensions and benefits.
Ever unnecessary dollar taken away from Private Sector Taxpayers to fund greater pensions & benefits of a Public Sector worker is one less dollar THEY can save towards their own (smaller) retirements.
Unions + Democrats = Bankruptcy!