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In this blog I and multiple commenters have broached the subject of the suspect constitutionality of PSPRS' replacement of the old perma...

Thursday, November 1, 2012

My pension will beat up your pension

For anyone interested in comparing how his or her Arizona PSPRS pension compares to those in other states, go to this link: (Calculate Your Public Pension).  I can not vouch for other states, but I checked the accuracy of its calculations against PSPRS' own pension estimator and found it to be right on.  I calculated a firefighter pension for an individual who began working in 2000 and retired with 25 years of service in 2025 at the age of 55 with an average salary of $67,000 for his high three years.  Here is how this pension stacks up against the other states' pensions available for comparison:

StateMonthlyAnnual Male  Female
Arizona$3,490$41,875  $800,986   $859,309
California$3,490$41,875 $800,986  $859,309
Connecticut$1,578$18,936 $479,327  $522,594
Florida$4,188$50,250 $961,184  $1,031,171
Illinois$3,490$41,875 $1,111,790  $1,214,942
Louisiana$4,653$55,833 $1,067,982  $1,145,745
Maine$1,619$19,430 $371,658  $398,719
Montana$3,490$41,875 $1,111,790  $1,214,942
New Jersey$3,629$43,550 $952,846  $1,031,423
New York$2,038$24,455 $521,216  $562,984
North Carolina$1,905$22,864 $437,339  $469,183
Oklahoma$1,675$20,100 $384,474  $412,468
Washington$2,792$33,500 $723,670  $782,283

The large figures under the male and female headers are the cost to purchase a guaranteed lifetime annuity, beginning at age 55, that paid the same monthly income provided by the corresponding state pension.  The variation in annuity cost between states with the same monthly payment is caused by variations in how COLA's are calculated for each state. The longer life expectancy of women accounts for the higher annuity cost for a female retiree.  These annuity figures give a good indication of the true value of someone's pension, especially in comparison to other retirement vehicles like 401(k)s and Social Security.

The current annual contribution limit for deferred compensation accounts like 401(k)s, 403(b)s, and 457(b)s is $17,000 per year with a $5,500 per year catch-up amount for those over 50.  These amounts may be increased each year based on inflation.  In order to reach the same $800,000 amount to purchase the equivalent annuity for an Arizona PSPRS retiree, an individual would have to put away about $862 per month ($10,344/year) for 25 years at a monthly compounded rate of 7.85%.  This assumes that someone could save this amount for all 25 years and earn PSPRS' assumed rate of return of 7.85%.  If we drop the monthly compounded rate to a more conservative 5.0%, the amount saved each month would increase to $1,345 ($16,140/year). For an individual in Maine, it would be necessary to put $624 per month away at a monthly compounded rate of 5% (or $400 per month at 7.85%) in deferred compensation to achieve the same monthly benefit as a Maine firefighter.  All of these contribution amounts could be reduced by any matching contributions made by an employer. 

As can be seen by the calculations in the last paragraph, the real takeaway here is not how Arizona's public safety pensions compare to other states' pensions, but how they compare to defined contribution pensions where most of the responsibility for saving falls on the worker, not the employer. It shows how difficult it is to save for retirement, even if one socks away the annual maximum into a deferred compensation retirement account.  It also shows how generous public safety pensions are.  In the next post, we will crunch some more numbers to examine how much a PSPRS member's total career contributions to PSPRS compare to his total retirement benefits.

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