By: Mark Glennon*
Mr. Average was a Chicago firefighter who retired last year. His wife worked outside the home, as in most families today. Ms. Average taught in a Chicago suburban school and she retired last year, too, when both of them were 58 years old. Mr. Average worked 30 1/2 years as a firefighter and Ms. Average worked 33 years as a teacher.
What is their combined pension? How much money would a couple without a pension need to be in the same financial position as Mr. and Ms. Average?
Here’s the analysis based on pension and salary numbers from the most recent publications of the Chicago firefighters’ pension and TRS, the pension for Illinois teachers outside of Chicago. These are, in fact, the average salaries and pensions in each of those systems for last year’s retirees who had the years of service assumed above:
Salary when he retired: $110,000
Annual pension amount: $78,000
Salary when she retired: $94,500
Annual pension amount: $67,000
Salary at retirement: $209,000
Annual pension amount: $145,000
Pensions for both of them will increase three percent each year irrespective of inflation.
What are the current cash values of those pensions? That’s no mystery. Anybody can buy an annuity providing comparable payments for the remainder of their life, though the prices vary a bit depending on who is backing up the promise to pay.
To duplicate Mr. and Ms. Average’s pension, you would have to pay about $3.5 million in cash today.
To get that, I asked a retirement specialist for a quote on two annuities for payments comparable to Mr. and Ms. Average’s pensions, at their age. Answer: $3.7 million. You can also get quotes online yourself at sites for annuities, like the one linked here for Fidelity Investments. Use the same numbers as Mr. and Ms. Average there and you get a total cost of about $3.4 million (but that’s with just a 2% annual COLA). Those quotes do not include survivor benefits — the annuity for one spouse would terminate entirely upon death. In contrast, public pensions do have survivor benefits for dependents, which would boost the cost of a comparable annuity substantially. Nor do those annuity prices include healthcare benefits.
Keep two things in mind:
- Since Mr. Average worked 30.5 years before retiring at age 58, he probably worked at least four years in a prior job, so he should have additional benefits from that.
- As a teacher, Ms. Average worked 165 days per year so she, too, may have other benefits from work during the summer. In any event, she did not work a full-time equivalent of a career in the private sector. To really compare her compensation to most other jobs you would need to mark her’s up by 33%.
If you’re shocked by how large those numbers are, that’s perhaps because your are regularly misled by “average pension” numbers. The average pension paid by any particular plan includes those who worked only part of their careers in a job covered by that pension, early retirees and part-timers. For example, the average TRS pension is only $46,500, mainly because of teachers who taught only part of their career in a school in that system. Instead, you really have to look at the average paid for a person retiring recently who worked their whole career in that system.
How do those pensions compare to Social Security benefits and retirement accounts in the private sector? This year’s maximum benefit at 66, or full retirement age (which is the benchmark the agency uses), is $31,956 a year. The present value of an annuity for that amount at that age would be about $570,000 (disregarding survivor benefits, as done above). But the average Social Security benefit is less than half that — $15,444 per year. And the median near-retirement household retirement account (for those who even have such an account) is about $104,000. So, the total value of those two Social Security payments for husband and wife, assuming the maximum, plus two retirement accounts of that size would be about $1,350,000, which is under 40% of the value of Mr. and Ms. Average’s pension.
One objection to the average pension numbers I used might be that they include high paid administrators. I don’t think that distorts the numbers materially, for two reasons. First, there just aren’t that many administrators compared to rank and file pensioners. Second, “spiking” is a major problem throughout Illinois, particularly in TRS, as widely reported. Spiking is moving rank and file workers into those high paid administrator positions as they approach retirement in order to increase the pension. Distinguishing spikers from true administrators would be difficult and it’s fairer, anyway, to keep them in the averages.
I used the Chicago firefighter and TRS pensions as the examples here because they are particularly important. The Chicago firefighter pension is among the most underfunded of the major pensions in the state (24% funded), making it a major element in Chicago’s crisis. TRS has by far the state’s largest unfunded liability ($58 billion). Other pensions have salary and pension levels that may be higher or lower. Chicago police salaries and pensions, for example, are somewhat lower than for firefighters. Judicial pensions are much higher.
Beyond that, the numbers should speak for themselves.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.