Byron Schlomach

Rich Man, Poor Man: Public Pensions and Taxpayers

Posted on May 22, 2012 | Author: Byron Schlomach
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While state lawmakers are to be congratulated for passing a balanced budget and largely holding the line on spending increases, there is an unnecessary $11 million spending increase tucked in the nooks and crannies. That’s the additional contribution to the state’s financially troubled retirement funds for state workers.

I’m regularly told that Arizona’s public employee retirement system is one of the best managed in the nation. That’s old news, though. From 2001 to 2009, Arizona’s retirement system funding level dropped 39 percentage points, the third worst performance among the states. Officially, Arizona’s state pension systems are $15 billion (with a “b”) short, though other estimates show them much further in the red.

The Manhattan Institute recently released a public pension calculator for Arizona. You can calculate the total annuity that would be required to fund a given individual’s pension. For example, let’s say a teacher retires at 55 with 33 years of experience, making $60,000 per year. The yearly pension would be about $45,000. If the teacher had saved for her own pension, she’d have to have about $870,000 in the bank.

By my calculations, for a teacher to save $870,000, she’d have had to save 15 percent of her salary and earned 8 percent interest every single year, without exception. Taxpayers are effectively on the hook to guarantee a retirement as if public employees had been this disciplined and this clever as investors. We all want workers to have access to retirement plans, but they should be more in line with what regular taxpayers have. The rest of us fund our own retirements while dealing with recessions and the realities of being unable to save 15 percent every year and guaranteed rates of returns in the stock market.

Legally, it might not be possible to get taxpayers off the hook for current public employees. But there’s no reason we should keep digging the hole. New state workers should get 401(k)’s that they own and manage – and that don’t make false promises that taxpayers are forced to keep.

Learn more:

Goldwater Institute: Defusing the Pension Bomb: Making Retirement Plans Solvent for All Public

Goldwater Institute: Debt and Taxes: Arizona Taxpayers on Hook for $66 Billion Tab Run Up by State, Local

Manhattan Institute: Calculate Your Public Pension

Cato Institute: State and Local Pension Plans: Funding Status, Asset Management, and a Look Ahead (PDF)

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