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Monday, August 12, 2013

A little perspective through a tale of two pensions

The Arizona Republic has continued its excellent reporting on the Public Safety Personnel Retirement System (PSPRS) with a four-day series by Craig Harris and Beth Duckett that ran in May 2013.  It is a must-read for anyone concerned about the future of PSPRS.

The series covers several issues, including pension spiking, the Deferred Retirement Option Plan (DROP), the ballooning pension cost of employers, and the trade-offs between pension funding and providing services to citizens.  While these issues can often descend into dry financial data and analysis, the first article of the series tries to put a human face on some of the issues by comparing the pensions of two retirees on opposite ends of the pension spectrum.

The article uses as examples the pensions of an assistant fire chief who retired from the Phoenix Fire Department and a retiree (his rank is not given but I will refer to him as a firefighter throughout) from the Lake Havasu Fire Department.  Through the use of unpaid sick leave, vacation, and other deferred payments, the chief, who retired in December 2011 after 37 years of service, was able to amass a DROP payout of almost $800,000, as well as an annual retirement of $130,000.  This chief then became Peoria's Fire Chief where he makes an annual salary of $145,000 and is eligible to participate in another retirement plan.  By comparison, the retired 61-year-old Lake Havasu firefighter, who retired in 2000 after 20 years of service, has an annual pension of "just under $40,000."  He states that his medical expenses have become so high that he has had to forgo his family's dental insurance.

The initial visceral reaction to this pension comparison is to be concerned or outraged by the nearly million-dollar payout to the retired chief.  Estimating from numbers given in the article, the chief was able to increase his average annual salary during his last three years by $56,186 (one-third of his total unused vacation time, sick time, and deferred compensation benefits) through the sell-back of this unused time.  Entering the DROP after 32 years of service meant that he would receive 80% of that in retirement, or an additional $44,948 per year, for the rest of his life.  If the chief lives another 20 years, he will make almost $900,000 more in retirement through this spiking of his pension.  This is in addition to the nearly $800,000 DROP payment he has already been paid. 

Depending on where you stand, this comparison has multiple ways to concern or outrage you.  The most obvious is a near-million-dollar first-year payout to the retired chief, which viscerally seems wrong for a public servant.  This big payout is even more troubling when one considers the financial burden being shifted to taxpayers, who are on the hook for most of the shortfall in PSPRS.  There is also the wide disparity between the pensions of the retired chief and firefighter, though it must be noted, the chief worked the maximum years and participated in the DROP while the firefighter worked the minimum years and retired without taking advantage of the DROP.

The retired firefighter expresses no animosity toward other retirees with large pensions.  He states, "I know these guys went above and beyond to serve the community.  I understand why some may not understand — or may just be jealous.”  The article states that this 61-year-old firefighter retired in 2000 after 20 years of service and has a current pension of "just under $40,000."   This again is an estimate based on figures from the article, but if we use an annual pension of $39,000, he would receive a monthly retirement check of $3,250.   Between 2001 and 2012 there have been a total of $1,524 in COLA increases to his monthly benefits.  Subtracting the COLA's from his current benefit would mean his initial monthly benefit was $1,726 after 20 years of service.  Doubling this and multiplying by twelve gives an average annual salary for his high three years of $41,424 in 2000.  If he had worked five more years and retired at 53, instead of 48, this would have earned him an extra $431 per month.

The article uses the pensions of the two men to show that not every retired PSPRS member is walking away with an unseemly financial windfall.  However, we need to look beyond just the amounts of money mentioned. The retired chief worked for the largest fire department in the state for 37 years and ascended to one of its highest-ranking positions.  If we assume he started at age 20, he would have been 57 years old at retirement.  The retired firefighter worked for a small department and retired as early as possible at only 48 years old.  While making no judgments about either man's career or personal choices, it is obvious that one man had to work harder and longer to achieve both his position and his benefits.  He retired nine years older and worked 17 years longer, and no doubt, had to spend countless hours of his own time to study for promotions and learn the skills necessary to qualify for those promotions.  This work was obviously worthwhile to him as he took a job as Fire Chief in another city after retirement.

The retired firefighter chose a different path.  He earned an intangible but equally, and some might say more valuable, benefit in retirement: time.  He retired at 48, an age when many are still in their peak earning years.  He was able to immediately begin drawing retirement benefits when many can not draw them until 59 1/2 years of age, or in the case of Social Security, 62, 65 or 67 years of age.  He was able to work for a mere 20 years yet will draw benefits until he dies (with spousal benefits continuing if he has a surviving spouse).  Even if we count his work life as beginning at age 18, he is still likely to draw a benefit check from PSPRS for more years than he worked.  Retiring at 48 is a dream for most people. He achieved it and has lived it for the past 13 years.

Once again, the idea here is not to criticize either the retired chief or the retired firefighter.  Both did their jobs and took advantage of the benefits available to them.  Neither has anything to apologize for.  However, we have to look at this through the eyes of the taxpayers and the Arizona legislature.  A legislature, I might add, that beginning next year will no longer have its own defined benefit pension for any newly elected members.  The retired chief looks bad because the sheer amount make it look like he gamed the system to enrich himself.  As more such cases like this are publicized, the pressure to end pension spiking will become greater.

What of the retired firefighter?  I do not know the authors' intent, but if he was meant as a sympathetic character, he does not fit the bill.  There is an undertone of entitlement in his comments, whether he meant it or not.  The "struggle" of living on $3,250 per month would not seem so bad if he was aware that the maximum Social Security benefit for a 70-year-old retiring this year is a whopping $3,350 per month.  (See here for a comparison of PSPRS versus Social Security.)  Working 22 more years to get an extra $100 a month does not seem like a good trade-off to me.  While the retired firefighter's pension is portrayed as less than adequate, he appears to be in an very enviable position when his retirement is placed in perspective with those of non-PSPRS members.

While it is easy to fixate on the huge payout made to the retired chief, I would argue that each man has done quite well for himself.  The difference between them is that one man's choice paid off better in time while the other man's paid off better in financial reward.  This is a choice that most workers can only imagine when it comes to their retirement.  The purpose of a pension is to provide you with income when you can no longer work.  PSPRS, in its current state, not only fulfills this purpose but goes well beyond it.  If you are concerned about the public image of PSPRS it is important to remember that while a $1 million payout to a retiring civil servant looks bad to most taxpayers, retirement at 48 years old looks pretty good to most working people.

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