New Calculator Shows Unfairness of Oklahoma’s Lucrative Government Pensions

The national focus on lucrative government retirements began in July 2010 when word leaked out about the outrageous government pensions provided to city workers in Bell, California. Many citizens across the country started wondering if their government entities provided similarly big pensions to their government workers. Most recently, news reports out of Chicago highlighted the cases of union bosses who manipulated the government pensions system to grab six-figure annual pensions.

In our continuing effort to shed light on the cost of government in Oklahoma, OCPA, in partnership with the Manhattan Institute, has released a new data tool that shows just how good government workers in Oklahoma have it. This pension calculator allows you “to estimate the pension that you would collect after a career as a general government employee and to see how much money you would need to save on your own (your total annuity cost) to replicate that guaranteed income stream in the private sector.” The easy-to-use calculator is available at CalculateYourPublic Pension.com/OK.

To see how good Oklahoma government workers have it, all you have to do is answer four basic questions.

• What is your target retirement age?
• How many years of service will you have at retirement? 
• When were you hired? 
• What is your final average salary?
  

Once you answer those questions, the calculator provides you with “your pension benefit” and “your lifetime annuity.” The pension benefit is the amount you would receive each month and year as a retired government worker. The lifetime annuity is the amount of money you would need to have in the private sector to obtain a retirement income equal to the government worker.

For example, under the 80 points rule (if you joined the pension before July 1, 1992), if you retired at age 52 after 30 years as a high-level state worker and had a final average salary of $100,000, you would receive a $5,000 monthly pension payment in your first year of retirement. If you were a private-sector Oklahoman, to retire at age 52 with a $60,000 per year benefit, you would need to have more than $1.2 million in the bank. To put this figure in perspective, the Employee Benefit Research Institute reports that the average 401(k) balance for Americans is roughly $60,000, which means our Oklahoma government worker gets a pension in one year equal to the entire average retirement account of private-sector Americans.

If you fall under the 90 points rule (if you joined after June 30, 1992), then you receive a slightly less generous formula. For example, if you retired at age 57 after 35 years of service and had a final average salary of $60,000, you’d receive a monthly pension of $3,500.

It gets worse.

As a result of his early retirement, assuming our high-level government worker lives until age 78, his total pension payout will total $1.56 million. Because government workers only contribute 3.5 percent of their annual salary, the most he will have contributed to the pension is $105,000, or less than 7 percent of the total payout. The return on his investment after 30 years would be a stunning 1,400 percent! Try finding that kind of investment return anywhere in the world.

The reason Oklahoma government workers get such an astonishing return on their investment is that Oklahoma taxpayers get stuck with the bill. As government workers put just 3.5 percent into their pensions, Oklahoma taxpayers have to contribute 16.5 percent of each government worker’s salary into the pension on their behalf. For our high-level Oklahoma government worker, in just his last three years of work, taxpayers would have paid nearly $50,000 into his pension, which is almost half the amount he put in over his entire government career.

For private-sector Oklahomans, employers typically contribute 10.2 percent to their retirements: 6.2 percent into Social Security and 4 percent into a 401(k) plan. For the vast majority of Oklahomans, the Social Security program represents the largest element of their retirements. In order to receive the full benefits of the Social Security program, private-sector Oklahomans must wait until they are 67 years old.

In stark contrast, some state government workers can retire with full pension benefits after just 30 years, making some able to retire when they are 50 years old. With a life expectancy of 78 years, these young retirees will collect their pensions almost as long as they worked for government. Many of these retirees quickly come back into the system after “retiring” and engage in the practice of double-dipping—receiving two paychecks from government-funded sources.

It is time to phase out government defined-benefit pensions.

New idea? Michigan ended defined-benefit plans for new state workers back in 1997. Today, 49 percent of Michigan state workers are in 401(k) plans. Right-wing attack on government workers? The District of Columbia has used 401(k) plans since 1987. Even Democratic-led Rhode Island enacted strong pensions reform legislation this year by moving government workers to a hybrid system. The hybrid system contains a small pension with a 401(k) component. The key benefit of this hybrid system is that it significantly limits the risk borne by taxpayers of a bailout.

Oklahoma’s pensions are underfunded. According to the Comprehensive Annual Financial Reports for the six Oklahoma government pension plans, for every $1 in liabilities, Oklahoma’s government pensions possess from as low as 52 cents in assets to as high as 96 cents. While two of the smaller pension-plan funding ratios are healthy, the funding ratios for the two biggest plans are among the worst in America. The table on the following page outlines the state of play for Oklahoma’s six government pension plans.

This severe underfunding crisis subjects Oklahomans to a very real possibility of a taxpayer bailout should the global economy continue to head into a recession. If taxpayers want security against a pension bailout, we must stop the bleeding and move new government workers to 401(k) plans and reform the pensions for existing workers to reflect the norms for Oklahoma’s private sector.

As in any Ponzi scheme, workers already in the system need the contributions of future workers to fund their pensions. These pyramids always collapse and those last in always get left holding an empty bag. New workers and taxpayers shouldn’t be exposed to this type of risk. The reality is that the private sector moved away from pensions, making them largely a creature of government, because guaranteed large annual payouts for pensioners’ lives make predicting actual liabilities highly speculative and costly.

For existing workers, Oklahoma should adopt a hybrid system similar to the plan Rhode Island adopted this year. A sliding scale should be used to equitably deal with government workers near retirement versus government workers with plenty of time left to build up the 401(k) component. This reform would lower the unfunded liabilities of the six pension plans and lower the bailout risk for taxpayers.

It is past time for the legislature and Governor Mary Fallin to enact strong government pension reform in Oklahoma. For reform to happen, Oklahomans must leverage this new pension calculator to get educated and to pressure elected officials to put taxpayers ahead of government workers.

Without reform, Oklahomans will continue to bear all of the risk, as government workers enjoy the good life in retirement.

How is that fair?

OCPA research fellow Matt Mayer (J.D., The Ohio State University) is a former senior official at the U.S. Department of Homeland Security. Mayer also serves as a Visiting Fellow with The Heritage Foundation, where he heads the Federalism project. Mayer’s book, Homeland Security and Federalism: Protecting America from Outside the Beltway, argues for reversing the federalization of homeland security by returning power to states and localities.