[quote=CA renter]
The employees pay around 9% of their income toward their pensions, and the employer covers another part that is determined periodically by actuaries (usually updated every 1 to 3 years, depending on the agency and benefit formula offered, along with investment returns, etc.). The majority of the money used for benefit payments comes from investments. I agree that pension funds should be much more conservatively invested, and that contribution amounts and benefit formulas should be adjusted accordingly. Unfortunately, I am not in charge of these decisions.[/quote]
Here’s a table of the math. I made the following assumptions. You currently make 80K after 30 years of service. You started back in 1985 at just about $20K. I think those reasonable for some average worker. We could changes the starting and ending number but it won’t make much difference because defined benefits typically use the last year or last couple of years of compensation as a benchmark and usually 30 years of service is going to get you at lease 50% of that amount maybe 60 or 70% spending on the position.
Lets assume this hypothetical employee gets $48K in defined benefit compensation (60% of 80K). That’s probably reasonable. Let’s also assume that we save 10% of this employees pay every year and put it into a conservative investment portfolio. We’ll do the most conservative 30 year treasuries. I’ll give you the benefit of compounding that interest rate too. So you buy a 10% year bond back in 1985 I’m going to go ahead an let you reinvest dividends at that same rate because I don’t want to complicate the math.
So what do you end up with after 30 years. I came up with $360K or so. For the private sector you take that $360K buy an annuity because you want to be secure in retirement. Guess what that gets you just about $21K per year for a 6% annuity excluding fees. Even if you were to draw down some of that money each year it doesn’t get you anywhere close to the defined benefit. You want to be conservative and offer a defined benefit retirement plan, then for an $80K year salary it needs to be much closer to $20-30K per year. Not close to $50K or even higher in some cases.
