Broker Check
                                                                      May 31, 2007

Government Jobs Have Best Retirement Benefits

          As the first wave of 79 million baby boomers head to retirement, the nation is dividing into two classes of workers; those who have government benefits and those who don’t.  The gap is accelerating in every way-pensions, medical benefits, retirement ages.
          Retired government workers are twice as likely to receive a pension as those in the private sector, and the typical benefit is more lucrative.  The nation’s 6 million retired civil servants-teachers, police, administrators, laborers, received a median benefit of $17,640 in 2005 according to the Congressional Research Services.  Eleven million private sector retirees covered by traditional pensions got only $7,692.00.  
          Government generosity can have serious consequences for taxpayers and pensioners.  Some states have troubled retirement systems that may require huge tax increases, spending cuts, or even defaulting on promised benefits.  The U.S. government has a bigger unfunded liability for military and civil servant retirement benefits (4.7 trillion) than it does for Social Security (4.6 trillion).
          State and local governments have sweetened retirement benefits during the past decade at a time when corporations have soured on them because of their cost.  Only 18 % of private workers now have traditional defined benefit pension plans compared with more than 80 % of government employees.
          A typical full time state or local government worker made $78,853 in wages and benefits in 2006, $25,771 more than the typical private sector worker, reports the Bureau of Labor Statistics.  The difference was $7,604 in 2000.  The compensation advantage holds true for all types of workers, from teachers to laborers and managers.  Better benefits for government workers is the biggest reason for the growing compensation gap.  The boost in benefits is a tribute to the growing political and negotiating power of public employee unions, which have thrived while industrial labor unions and the benefits they won, have eroded.
          Pensions for civil servants are superior to private pensions in subtle ways that make a huge difference.  For example:

  • Governments generally base benefits on a worker’s three top earning years.  Private pensions use five years, which lowers the average.
  • Governments let retirees add the value of overtime, unused leave and other benefits into the formula.
  • Governments permit early retirement at age 50 or 55 with less of a benefit reduction than private pensions.
  • Governments provide free or subsidized medical care for retirees under age 65 and supplemental coverage after that for those on Medicare.

          Some blame elected officials for awarding unsustainable retirement benefits to win political support from employee union because the settlement does not cost anything today and the officials will be out of office when the payments are due.
          Nevertheless, baby boomer retirements together with longer life spans for those in retirement as well as not enough young workers and immigrants will force governments to confront the rising cost of civil servant retirements.
          Our cautious suggestion for our clients to cope with this problem is to save more assets in order to pay the increased federal, state and local taxes (income, sales and excise taxes) that are coming.  Failing that, we suggest considering moving to lower cost states and states that do not tax income such as New Hampshire, Texas, Florida, Alaska and Nevada. Asbury Park Press 2/25/07 p. C1       

            If you have any questions about the foregoing or any other financial matters, please call us.  

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