It is said that government workers now make, on average, 30% more than private sector workers. Put that fantasy aside. It far underestimates the real figures. By my calculations, government workers make more than twice as much. Government workers are America’s fastest-growing millionaires.
Doubt it? Then ask yourself: What is the net present value of an $80,000 annual pension payout with additional full health benefits? Working backward, the total NPV would depend on expected returns of a basket of safe investments–blue chip stocks, dividends and U.S. Treasury bonds.
Investment pros like my friend Barry Glassman say 4% is a reasonable return today. That’s a pitiful yield, isn’t it? It is sure to disappoint the scores of millions of baby boomers who will soon enter retirement with nothing more than their desiccated 401(k)s, down 30% on average from 30 months ago, and a bit of Social Security.
Based on this small but unfortunately realistic 4% return, an $80,000 annual pension payout implies a rather large pot of money behind it–$2 million, to be precise.
That’s a lot. One might guess that a $2 million stash would be in the 95th percentile for the 77 million baby boomers who will soon face retirement.
That $2 million also happens to be the implied booty of your average California policeman who retires at age 55. Typical cities in California have a police officer’s retirement plan that works as follows: 3% at 50. As the North County Times of Carlsbad, Calif., explains:
Carlsbad offers its police and firefighters a “3-percent-at-50” retirement plan, meaning that emergency services workers who retire at age 50 can get 3 percent of their highest salary times the number of years they have worked for the city.
City officials have said that in Carlsbad, the average firefighter or police officer typically retires at age 55 and has 28 years of service. Using the 3 percent salary calculation, that person would receive an annual city pension of $76,440.
That does not include health benefits, which might push real retirement compensation close to $100,000 a year.
Who are America’s fastest-growing class of millionaires? They are police officers, firefighters, teachers and federal bureaucrats who, unless things change drastically, will be paid something near their full salaries every year–until death–after retiring in their mid-50s. That is equivalent to a retirement sum worth millions of dollars.
If you further ask the question: How much salary would it take to live, save a build a $2 million stash over a 30-year career, the answer would be: somewhere close to $75,000 more than the nominal salary, if you include all the tax bites associated with earning, saving and investing money.
In other words, if a police officer, firefighter, teacher or federal bureaucrat is making $75,000 a year, she is effectively making twice that amount. Implied in her annual pension payout is that she diligently saved half of her annual salary–after taxes–in order to save, invest and build–again, after taxes–the $2 million pot.
So when you hear that government workers now make, on average, 30% more than private sector workers, you are not getting the full story. Government workers make more than twice as much as private sector workers, on average, when you include the net present value of their pensions.
How long can this last?
HT: Orange Punch