We’re going to pay for all of this with our taxes

This is a contribution from Bud Hebeler who runs Analyzenow.com

How would you like to have retirement resources that will provide about the same income in retirement as when working and be inflation protected? Answer: Go to work for the government. Oregon has one of the richest pension plans. After 30 years of employment, pensions equal or exceed their working compensation per 1999 rules. (Statesman Journal, April 20, 2003) Add Social Security which may provide another 40%.

The baby boomers with government pensions will exceed the number of baby boomers getting pensions in private industry if current trends continue. Consumer Reports Money Adviser (May, 2008) cites Boston College research showing that while 36% of the private sector employees had defined benefit plans in 1992, only 19% have such plans now. That translates to about 22 million private sector employees (19% of 116 million) who get pensions. Virtually all of the 23 million government employees get pensions. This does not count those in the military who also get pensions, and I believe does not count postal service employees or those in similar government sponsored corporations like the Pension Benefit Guarantee Corporation that’s supposed to save pensions for the rest of us.

Most federal pensions have inflation protected cost-of-living-adjustments, COLAs. Many state pensions also have this rich benefit. Practically no private sector pensions have COLAs. At 65, a pension with a COLA has a funding obligation about 50% more than a fixed pension assuming future inflation is only 3%. So if you’d go to buy an inflation adjusted immediate annuity with regular monthly payments like a pension, a COLA annuity will cost about 50% more than a fixed payment annuity. Said another way, a $1,000 a month COLA pension will pay $1,810 after 20 years of 3% inflation while a $1,000 fixed pension will still pay $1,000.

So we are paying into a pension plan that’s not our own even if we personally will not get a pension. That’s because we are paying for the federal, state and local government retirement plans with our taxes. As government increases in size, we’ll pay more—and even more with the COLA adjustments. Although politicians run for office on the basis of reducing government spending, it practically never means reducing the government payroll. Every addition for oversight or a function adds people. And it’s almost impossible to reduce the staff size in a government job. I can remember when congressmen had only 4 people on their staff while ten times that much is not uncommon today.

That’s not all. The percentage of retired people is increasing relative to the number of working people, perhaps 10% to 20% more in the next couple of decades. That means that an ever smaller working force is going to have to support an ever increasing number of aged people. This is not just for the government pensions. It also covers everyone’s Social Security (also inflation adjusted) and Medicare. Medicare is not only increasing from inflation—it’s increasing because of the increasing number of aged and faster-than-inflation growth of medical expenses of almost every kind.

It also means that over 17% to 20% of the work force will be in the government excluding the military and other quasi government workers and the unstoppable growth of government. That’s a powerful voting block. Government employees will always vote to keep their jobs.

Federal employees have subsidized health insurance in retirement as do many state and local government retirees. Very few private sector employees have this benefit. This is huge. A retired couple from the private sector pays about $700 a month for Medicare and Medigap policies, and that doesn’t cover drugs, uninsured costs and care of eye sight, hearing or dental work.

Government employees have 403(b) savings accounts with provisions similar to the 401(k)s in the private sector. But, in the case of the private sector, these savings plans are rapidly replacing pensions, not in the government sector. The public sector is better subscribed because many of those in the private sector opt out, even when the employer offers matching funds.

The average government employee now makes about 50% more than the average person in the private sector. USA Today (2/1/08) reports that “State and local government workers now earn an average of $39.50 per hour in total compensation …Private workers earn an average of $26.09 an hour. . . From 2000 to 2007, public employees enjoyed a 16% increase in compensation after adjusting for inflation compared to 11% for private workers.” In large part, many government workers can thank their very powerful unions and public shy politicians afraid to confront a large part of their voters.

So there you have it. We’ve grown a government that not only pays its employees better than the private sector, we give them better benefits. We’ll pay for those employees not only while they are working, but at an ever increasing rate while most of the rest of us in private sector retirement see our incomes cut by inflation.

General Motors, move aside. There’s another entity that is going to pay more dearly than you for all the retirement promises it has made. Ah, but it’s a sovereign power that has the ability to tax. Sorry about that GM. You have to manage better to catch up. The government doesn’t.


1 Response to “We’re going to pay for all of this with our taxes”

  1. 1 Steve

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