It seems that personal finance bloggers like to poke fun at the giant financial mess called California. We have one of the highest unemployment rates (12.4%), our housing market collapsed and don’t forget the humongous state budget deficit of $26 billion.
A lot of that deficit is caused by generous state employee pensions. Cities have the same problem in the golden state. I have news for everyone. California is not the only state in trouble.
The Pension Monster
According to the Brookings Institution, Philadelphia’s pension plan may become insolvent as early as 2014. Boston and Chicago may join them in 2018 along with the state of Illinois. Indiana and Connecticut follow in 2019.
This is a problem that has to be addressed fast as these states have less than a decade. California is at least solvent through 2030!
It’s not just an American problem. We’ve seen the protests in Europe over proposed pension cuts. It’s a global issue as France, Greece, United Kingdom and Japan all struggle with the same issue.
What Caused It
The main culprit seems to be over-optimistic projections regarding investment performance. Just like individuals that banked on their 401ks and homes value to continue growing at unsustainable levels, so did our government. After all, these institutions are run by people.
The city of San Diego halted contributions when the stock market was doing so well thinking the money would never be missed.
Another issue is failing to plan for the sheer numbers in the baby boomer generation. We started turning 65 on January 1, 2011 and 10,000 at day will be meeting that milestone. With generous government pensions, many have been retiring for the past decade.
Possible Solutions
There is no easy answer and the employee unions won’t like any of them because they require sacrifice. The taxpayers can’t afford to continue funding generous pensions for the few.
I don’t think there is one thing that will resolve it but rather a series of changes, but here are some ideas.
1. Raise the retirement age. In California, the pension age is 55 which is much earlier than the private sector.
2. Cap Pension Amount. The average worker receives a modest average $25,000 per year pension. But others receive more than $100,000 per year. That’s amazing!
3. Revise Payment Methodology. What I mean by this is instead of basing it on the last year’s salary, base it on an average of several years similiar to social security.
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Are public pensions an issue where you live? What ideas do you have to resolve this problem?
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Having lived in CA once upon a time, reading about CA always excites me! But I’m hopeful CA will find a way, as always!
Thankfully, our state does not have a pension problem, and even now the legislature is getting ready to change the structure of our state’s plan – they dont want to have problems in the future. There is no budget problem here, and we have a surplus + money in the bank.
@ Money Cone, I think we will find a way to fix the problem. This state has a lot of resources and will recover after doing the hard work.
@ Jeff, that’s great that your state is being proactive. We did have a surplus a few years ago.
Hey! Don’t forget to link up this month http://3boysandadog.com/2011/01/blogger-appreciation-day-december-2010/
Pensions are not the problem. Over spending is the problem! The California pensions are getting the spotlight because of the few absurd exceptions. I will be a recipient of a CA pension as a teacher. I will have approx 16 years in the system, I will receive $2,000 per month. Some may feel that is a lot! Context is everything. In 10 years of teaching, I received only one raise of 6%. Considering the state budget issues, I have no expectations of another raise. For the first ten years, my pay did increase because I met certain requirements. For the record, I am not complaining, I made a choice when I became a teacher. This my seventh career and I am and will do fine! If I compare what I receive as a teacher vs. the private sector, it is a tragedy. If you want your children to get the brightest and the best people as teachers, you may want to reconsider the atack on unions, pensions of teachers, police, firefighters etc.
Krant Cents, I agree and disagree. Yes, overspending is a big problem here. However, many of the municipal, county and the state pension programs for public employees are too generous; not every one but many of them including in my city of San Diego.
I’m in SoCal so I feel your pain. 🙁 Didn’t realize the pension age was 55. That needs to be raised, people have to suck it up, or find other passive income streams. 25K to 100K range, this sounds like professional sports! If that’s the case, we need a cap as well. Unbelievable, thanks for shedding some light on the subject. 🙂
That’s the age for the state; it may vary at the city and county levels. We just have to know where our tax money goes and the bad decisions that have been made in the past to prevent them from continuing or reoccurring.
Not that I’m aware of. However, raising the retirement age up from 55 makes a lot of sense to me.
Jenna, that is a little low when you think that social security started at 65 for full retirement was raised to 67 and may be adjusted even higher in the future.
I don’t have a state pension from CA or anywhere but as a Brit living in the US I can voluntarily contribute to the UK state pension system and I will receive payments after retirement. Now I’m waiting to see what changes will be coming to that.
I think some changes are inevitable but the challenge is that many people who are nearing retirement have probably been banking on those pension payments. It doesn’t seem feasible to make significant changes for them because they may have no way of making up the shortfall. People who have longer to go to retirement can adjust their planning to compensate for the changes.
Mandy, that’s interesting that you can contribute to the UK system from abroad. I guess Americans could pay into social security when living elsewhere (not sure).
Any changes will be grandfathered in so people close to retirement won’t have to change their plans.
I will also be the recipient of a teacher’s pension in the future. As of right now, my pension would barely equal $1,000 a month! However, I am banking on something a little higher than that down the road. Maybe the retirement age on pensions needs to be raised, or maybe they need to reevaluate how they figure out final pension payment. All I know, if that if I’ve been contributing to it for all of these years, I better get something in return!
On a side note, the way my pension works is that instead of contributing to social security, I contribute to my pension fund. So if there’s no pension to draw from come retirement, I’ll be screwed! (At least that 40% of my retirement planning will be completely messed up!)
Little House, I think they’ll have to make adjustments at least for new employees. Raising the age does make sense since it’s not in line with the standard social security retirement age. I’m sure these rules were put into effect when California had money to spare in the budget.
One of the main problems with the defined benefit pension is that no one is dying! Sorry for all you older folks in your late 80s and early 90s when the actuaries did their work in the 70’s when you were starting to retire they figured you’d be gone! Combine that with the un-guessable fact of medical inflation.
Kinda makes you want to think about the past…but that wasn’t as good as you remember it lol
You know, I strongly believe that those who are entitled to pension benefits that have accrued should get them. However, future recipients not yet of qualifying age may start to see some real changes. Personally, I’m in the same boat as most: no pension, it’s all up to me. But knowing others who have been in jobs where pensions were counted upon, this is scary stuff for them.
Seems as if we are just moving to a model where we’re all going to be completely individually responsible for cash flow in retirement. Best for all who are of working age with a while to go to get into that mindset at this point.
@Evan, interesting point about the increasing life span throwing a kink into things. I also think it would be good if we could keep non-experts (such as the San Diego City Council) making decisions about retirement plans. They don’t have the knowledge to make good decisions for the long term.
@Squirrelers, I should have been clearer that I wasn’t proposing changing things for those near retirement or that people lose what they’ve accrued. We just need to make changes so the plan will be solvent when it is time for the employees to retire.
I think pension reforms are not only necessary but practical. And, I strongly agree with the three solutions you have suggested. Obviously, people are living longer, many government salarys have gone way up recently and there are some pension shennanigans going on.
Anyone who hopes to receive a pension and those of us who are expected to pay for them have to face reality and implement reasonable reforms. Otherwise, more public pension systems will become bankrupt and pensions will only get a fraction of their pensions.
Bret, it is the right thing to do and I appreciate that Governor Brown is telling people the way out of this mess won’t be easy.
Unions are the problem. Think about it: 1) A union spends millions to elect politicians. 2) The same politicians negotiate union contracts with OUR tax dollars. This should be outlawed in all governments.
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