February 17, 2011--Pension Overhaul

While we wait to see what the president and Congress will do, assuming they do something, to fix the Social Security system, which is not sustainable at best for more than a couple of decades because of demographic changes, governors and mayors across the country are struggling more desperately to rein in their out-of-control municipal pension systems.

Down here in Florida, for example, one good thing Governor Rick Scott wants is to require public employees to contribute something, anything, to their 401(k)s. At the moment, Florida state workers are the only ones in America not expected to contribute to their retirement accounts. The state fully funds them.

Up in New York City, Mayor Bloomberg is proposing his own version of changes. Among other things, he wants the state legislature to amend the retirement eligibility rules. Currently, municipal workers are able to vest their pensions after only five years of service. Bloomberg wants that to be doubled to 10 years. At the moment, nonuniformed workers such as teachers can retire with full pay at age 55. He wants that raised to 65.

Policemen and firefighters can do much better. They are able to retire, again for at least full pay (more about the "at least" in a moment) after just 20 years of service, regardless of their age. I used to have a fireman as a neighbor who retired at 45. He then became a teacher and I am sure by now must be collecting two full city pensions.

In addition, retired NYC police and firemen, on top of whatever they collect from their regular retirement accounts, receive, in perpetuity, an annual $12,000 "stipend." (See linked New York Times article.)

This supplement costs the city nearly $1.0 billion a year and contributes to the annual $8.5 billion budget for all city pensions.

It came into existence back in the 1960s when John Lindsay was mayor. He agreed to it as an alternative to allowing uniformed workers to invest a portion of their pensions in individual retirement accounts. Since portfolios of stocks and bonds go down as well as up, to protect workers from any possibility of losses, he and his successors guaranteed them against that by agreeing to pay them each year the $12,000.

Bloomberg wants to end this practice as part of his overhaul of the city pension system.

And while he is at it Bloomberg wants to end the common practice that allows police, firemen, sanitation workers, and bus drivers from loading up on overtime during the year before they retire because by doing so, according to current pension rules, the amount they receive after retiring is tied to their total earnings during their last year on the job. Thus, for life, most make much, much more each year from their pensions than they did during their working years from their basic salaries.

Of course, unions in Florida, New York, and elsewhere are up in arms. But the mood of the public is such that as these frankly outrageous practices are coming to light, we may see some long overdue reforms.