
The Millionaire Cop Next Door - parennoob
http://www.forbes.com/forbes/2010/0628/opinions-rich-karlgaard-digital-rules-millionaire-cop-next-door.html
======
patio11
I sympathize with the general direction of the criticism ("defined benefits
pensions are much, _much_ more valuable -- and expensive -- than people
typically give them credit for"), but $2 million is strictly superior to a
$80k annuity, even if one's assumption is 4% annualized post-inflation returns
or, more pessimistically, a 4% safe draw-down rate. Cash doesn't expire when
you expire, pensions (mostly) do.

The fair cash value of the pension is closer to $1 million. (Please accept
this as a handwavy approximation as I'm on a train -- you can probably find
any number of calculators on the Internet which would give you a more exact
calculation.)

~~~
anifow
Yes, the author is pretty off-the-mark and I would say misleading. Here are
some scenarios worked out with www.numbercanvas.com

Early Retirement, Average Lifespan: $1 million

Early Retirement, Long Lifespan: $1.5 million

Average Retirement, Long Lifespan: $1.25 million

Average Retirement, Average Lifespan: $650,000

Early Retirement, Short Lifespan: $480,000

[http://pastebin.com/QU5dnCe8](http://pastebin.com/QU5dnCe8)

~~~
Ntrails
Expected joint life at early retirement (which is what the article prices) in
the US is ~35 years assuming spouse of similar age to the retiree (looking at
[http://www.irs.gov/pub/irs-pdf/p590.pdf](http://www.irs.gov/pub/irs-
pdf/p590.pdf) from a quick google).

The 4% was not defined as _real return_ , maybe it was supposed to be - but
otherwise you need to account for the inflation linkage of the annuity.

With that basis you get $1.4m with no inflation and almost exactly $2m with an
inflation assumption of 2%.

------
noname123
I think it's great that police officers, teachers and gov't employees with
seniority make six figures with pension in some of the better unionized
municipalities.

Their work provide a valuable and concrete service to the community. I think
startup enthusiasts on the other hand are kind of like starting a band,
providing entertainment/art for an audience and for the performer to satisfy
an itch. Life is a finite thing which makes our chosen paths speak for our
individual/subjective values. We shouldn't be green about other people's
financial or personal success, but should of focus on ourselves and embrace
the rewards and consequences our choices make.

I think that's what makes a Computer Programmer so exciting. You can either
choose to work for a startup and be a rock star or you can choose to work to
work at a regular company or gov't with good life balance and benefits; and/or
save your money and good planning to retire at mid-50's.

I must admit, sometimes it does feel like I didn't have the choice and have
been dealt with a bad hand. But I think how lucky I'm to be in US where I can
eat really delicious taco's, watch free TV shows/movies and chillax with peeps
and other things I enjoy without being rich.

Ofc, there's a lot of social pressure to earn more for your family and for
yourself, but I think relationships in general should focus on empowering the
other person than imposing with money, expectations or guilt. And being upset
with what other peeps make is just my own projections of my own insecurities.

~~~
nilsimsa
I just think we shouldn't be bankrupting the state and cities to pay for these
pensions.

~~~
dalke
Going back in time, when the person first started as an employee, the employer
made a promise that the person would receive a pension upon retirement. That
was part of the employment contract negotiation. People decided on a job based
in part on the entire earnings, which includes both salary and pension. Some
people are willing to take a lower salary in order to have a higher pension,
while others prefer it the other way around.

If the state and cities are going bankrupt then why did they enter the
contract in the first place? What was the economic planning they did which let
them conclude - apparently falsely - that they would be able to keep their
side of the bargain, and how has it broken down?

Personally, I believe it's a combination of continued pressure to lower taxes
and continued pressure to outsource government work to more expensive private
businesses, especially when tied to the philosophical idea that the government
should be small enough to 'drown it in the bathtub.'

In other words, another solution to not going bankrupt is to raise taxes,
rather than breaking existing contracts.

~~~
cmdkeen
It's because people live longer. When defined benefits were introduced many
people died before retiring, or if they did retire lived a handful of years.
Today it is perfectly possible to live longer post retirement than you spent
working in these kind of jobs.

Taken to its logical conclusion if there was a miracle pill that added 50
years to every lifespan the annuity system would implode.

Yet people, being people, don't like to accept that things have changed. They
stick to talk of contracts (where it is only accrued, previous years that are
contractually earned) without seeing the upside.

Basically you can have this pension and die at 70 or a less generous one and
live until 80.

~~~
dalke
Your argument is that the economic planners of 40 years ago didn't expect this
increase in longevity. They knew of course that people were living longer. Do
you have any evidence which might suggest that they significantly
underestimated the increase?

For example,
[http://en.wikipedia.org/wiki/File:Life_Expectancy_at_Birth_b...](http://en.wikipedia.org/wiki/File:Life_Expectancy_at_Birth_by_Region_1950-2050.png)
shows a pretty linear growth.

Assuming retirement at about age 60,
[http://www.infoplease.com/ipa/A0005140.html](http://www.infoplease.com/ipa/A0005140.html)
says white males in the 1950s had 16 years of life expectancy, and it's 22
years now. Not only is the trend increasing at a relatively constant rate, but
living "longer post retirement than you spent working in these kind of jobs"
appears to be relatively uncommon. Most people spend about 40-45 years
working, and about 1/2 that more on pension.

Unless you can point to some really firm numbers, I think you are incorrectly
underestimating the expertise of the actuaries of decades ago.

------
declan
Forbes is just now reporting on the obvious: $2 million in pension benefits
per retiree is becoming increasingly unaffordable for many cities. (Also
because municipal workers in some states can switch jobs to a nearby city and
get a second pension, that can jump to $4 million per person.)

In the San Francisco bay area we have this nearby example:

[http://online.wsj.com/news/articles/SB1000142405274870362530...](http://online.wsj.com/news/articles/SB10001424052748703625304575115551578762006)
"The study also found that lavish pay and benefit packages were a root cause
of the city's problems. In Vallejo compensation packages for police captains
top $300,000 a year and average $171,000 a year for firefighters. Regular
public employees in the city can retire at age 55 with 81% of their final
year's pay guaranteed. Police and fire officials can retire at age 50 with a
pension that pays them 90% of their final year's salary every year for life
and the lives of their spouses."

And another example in California, where residents may be required to pay more
in taxes (it's already the highest-taxed state) because of political
mismanagement and ballooning pension benefits:

[http://online.wsj.com/news/articles/SB1000142405270230481500...](http://online.wsj.com/news/articles/SB10001424052702304815004579419371878171830)
"Yet government pension costs are soaring as the bills that politicians
postponed during the hard economic times come due. No less than Warren Buffett
warned this week that "local and state financial problems are accelerating, in
large part because public entities promised pensions they couldn't afford." ..
Calpers also voted last month to dun state taxpayers for an additional $1.2
billion a year. And lo, the state Legislative Analyst's Office says that
California State Teachers' Retirement System (Calstrs) says it needs $5.3
billion to $5.7 billion more annually by 2020 to pay down its $71 billion
shortfall. That's more than California spends on the University of California
and Cal State colleges."

~~~
patio11
There also exists a culture in California of systematically looting the
pension system via "spiking", where everyone knows the formula of the pension
weights the last year's pay most heavily, and engages in a game of "I'll
scratch your back and someone will scratch mine in N years" whereby people are
allowed sudden bumps in seniority / job title / overtime hours months before
retirement, to no legitimate governmental purpose, with the sole objective of
increasing their pension's value. There are a variety of reforms designed to
address this, from speedbumps like "OK, we'll use the average of the last 3
years" to making spiking outright illegal. The common argument against
illegalizing spiking is, I kid you not, that spiking is so ingrained in the
cultural mores and expectations of California public servants that to deny
spiking for new retirees would be grievously unfair to them when compared to
Of-Course-I-Spiked-Everyone-Does retirees.

~~~
dragonwriter
Spiking as you describe it is _always_ outright illegal (if its done "to no
legitimate government purpose", its an outright illegal gift of public funds
-- but if the personnel decisions are made under existing laws and procedures
which exist to assure that personnel actions, positive or negative, _have_ a
legitimate government purpose, which is almost always the case with what is
usually described as "spiking", its not what _you_ describe as "spiking".)

What _isn 't_ illegal, and what is what is usually called "spiking", is people
changing their preferences in terms of what they will apply for that they are
qualified for, or what they will accept in terms of overtime requirements in a
position, based on proximity to retirement. With retirement programs that are
based on last-years salary, this can produce an outsize reward, which is what
reforms are intended to address.

And the closest argument to the one you present I've seen -- and I've spent a
lot of time in and around state government and public worker issues -- isn't
that its "ingrained in cultural mores and expectations", but that changing the
terms for current workers (not future workers) is not acceptable because the
terms of the retirement program are part of the deal they accepted when they
started working, and in which they have a -- legally enforceable under federal
law -- property interest, so that it would be _outright illegal_ to change the
terms (which is _exactly_ the reason that the change to the three-year rule
only worked for new hires.)

------
trhway
compare to your 401k contribution:

[http://paloaltofreepress.com/palo-alto-city-employees-to-
rea...](http://paloaltofreepress.com/palo-alto-city-employees-to-reap-a-boat-
load-of-money-on-taxpayers-sponsored-cruiseliner/)

"The city’s pension contribution for police managers will be $59,903 on
average, according to the proposed budget. Police officers pensions are the
next most expensive, costing $42,688 each, followed by firefighters pensions
at an annual average cost of $42,289, and fire chiefs pensions at $41,828."

This 40K+/year contribution is what allows to pay those 200K+/year pensions.

~~~
rhizome
Next time anybody says developers are too expensive, ask yourself how much
they would have to earn to get $50K in matching on their 401(k).

------
breakend
Having been raised in a single parent home with a government employed mother,
I know first hand that it is extremely difficult to raise a family on a
government salary. Like another commenter said, these plans also are paid for
from the government paycheck in part by the workers, reducing their current
salary. Often, these government workers are also raising families and putting
their kids through school. Without such a pension plan, this would not be
possible and many (especially single parent) families of government working
households would be stuck to a threshold close to the poverty line. The
reality is that just because over the course of 30-some-odd years of hard work
they accumulate enough pension to live a middle-class life style, does not
make them millionaires, especially when you take into account healthcare
deductions, the cost of living, their childrens' education, and any
mortgage/car payments. The least we can do is support the people that protect,
educate, and serve our communities. It is not necessary to bring light to
their supposedly vast troves of wealth (sarcasm) when there are plenty of
millionaires and billionaires who acquire their wealth through questionable
means.

(Also I don't approve of the fact that comments on the article itself are
disabled, sidenote.)

~~~
zo1
_" Often, these government workers are also raising families and putting their
kids through school. Without such a pension plan, this would not be possible
and many (especially single parent) families of government working households
would be stuck to a threshold close to the poverty line."_

Please can you explain to me, honestly. Why would someone that has children or
plans to willingly choose to take a pay cut in exchange for a big pension
fund? Sounds very selfish, because it implies that these people want to
struggle to pay for their children's upbringing and education just so that
they could have a "cushy middle-class" retirement when the kids are out of the
house. That is the quote and justification one of the posters below used when
explaining why it's okay that they get huge pensions instead of using their
salary to save up for retirement like the rest of society.

------
DeadHitchhiker
It's fantastic how articles like these trot out figures like '$80k a year!' as
if we're all supposed to be shocked and appalled that someone is making around
what it costs to have a decent home and raise a family. I guess we really do
need to pay our greedy firemen and teachers less, they have had it too good
for too long making a decent wage and deserve to go right on the scrapheap
with the rest of the trash in this country that we've already convinced to
work for peanuts. Not that they had a choice.

~~~
bruceb
Should you get paid near $80k a year for the next 26 years when you are not
working?

I also think it should be adjustable depending where you are living. Do you
live in the area and so plowing some of that money back in to the local
economy? If not there should be a reduction.

England is reducing some benefits for those who live abroad and thus not
spending money in the country.

~~~
DeadHitchhiker
> Should you get paid near $80k a year for the next 26 years when you are not
> working?

Yes. Why not? Because that offends your sensibilities about work? Because you
feel that people should work until they're 65~70 to retire, if they ever
manage to? Right now a number of school teachers are working until their late
60s to make a pittance upon retirement, trading down from houses to mobile
homes to even make their retirement manageable. Do you feel these people
aren't as worthy as others making obscene amounts of money as they essentially
raise the nation's children for them?

Your entire supposition either buys into the myth that there isn't enough to
go around or worse, that you simply believe because we treat the majority of
our labor pool like shit that anyone daring not to is in the wrong.

~~~
zo1
" _> Should you get paid near $80k a year for the next 26 years when you are
not working? Yes. Why not?_"

They got paid a salary their entire working career, which they should have
been taking out of to save up for retirement. You know, like the rest of
society does.

~~~
joshAg
you do realize that the workers negotiated a pension with the city in exchange
for lower salaries during the years in which they work, right? This pension is
their retirement savings.

The city's benefit is that they don't have to pay as high salary as they
otherwise would (without a pension); that means the city can take the money
they save on salary each year, invest it, and hopefully get a high enough
return that they save money compared to paying a full salary without the
pension. Essentially, the city wants to borrow money from the workers at A%
interest and then go invest it (maybe in itself, maybe in more traditional
investments) and hopefully get an ROI of B%, where B > A.

The workers' benefit is that they get a "guaranteed" retirement fund (ie less
risk) that they don't have to manage or worry about and depending on the
circumstances, a higher total compensation than they would without the pension
(ie the city pays them interest for essentially loaning the city money) (ie
better returns).

If the city's investments of the saved salary money returns more than what is
needed to fund the pensions, the city gets to keep that extra money.

~~~
zo1
So the politicians wanted to have their cake and eat it, no I get that
perfectly. On the one hand they promise large future payouts to gullible
public servants. And on the other hand they get to pander to the general
public about how they've reduced the budget (or not increased it). Ridiculous.

For that matter, why is the city in the business of trying to make a profit
out of peoples' pensions? And even then there was no accountability or
repercussions for politicians that decided to dip their fingers into the
pension investment pools.

And the last thing that I'd like to add in response. I think the reason why
most people are shocked at this article, is because they've been conditioned
and drilled with the thought that public servants are under-paid. But as you
say, the public servants did this on "purpose" as a risk-mitigating process.
If that's the case, then they need to stop yapping incessantly in the public
sphere about how they're paid less in comparison to their private
counterparts.

~~~
joshAg
> So the politicians wanted to have their cake and eat it, no I get that
> perfectly.

That's how capitalism works (under ideal conditions). Everyone tries to make
the best possible deal for themselves, not just politicians.

> For that matter, why is the city in the business of trying to make a profit
> out of peoples' pensions?

For a multitude of possible reasons. Because the profit there can be used to
reduce the tax rates. Because the profit can be used to pay for something that
the city couldn't otherwise afford. Because the benefits plan allows them to
more accurately plan future liabilities (compared to paying employees a market
rate salary (that's not otherwise lowered by a pension) that floats up and
down with inflation and the economy).

> And even then there was no accountability or repercussions for politicians
> that decided to dip their fingers into the pension investment pools.

Are you talking about embezzlement or about the city borrowing money from the
pension fund? The first is illegal and an enforcement problem that's pretty
unrelated to where the money was embezzled from. The second may or may not
actually be a problem depending on the terms at which the city borrows the
money. Regardless, that's also not related to pensions specifically, since the
city can borrow money at stupid terms from anyone, not just the pension fund.

> I think the reason why most people are shocked at this article, is because
> they've been conditioned and drilled with the thought that public servants
> are under-paid.

That's because the public workers actually were underpaid compared to private
industry workers when the deals were originally negotiated (even including the
expected value of the pension). Over the years since then, private
corporations have lowered the salaries they pay (usually by not keeping up
with inflation as opposed to actual pay cuts, though that happens, too) most
of their workers, so public sector jobs have become much more competitive.

> If [the public servants did this on "purpose" as a risk-mitigating
> process]'s the case, then they need to stop yapping incessantly in the
> public sphere about how they're paid less in comparison to their private
> counterparts.

I have a few problems with many of the implicit assumptions in this statement;
specifically that there is an agreed upon way to value a pension, that there
is an agreed upon way to value the value of the risk-mitigation of a pension
plan, that there is little variation in the ratio of the total compensation
public workers earn to a market rate salary across all government workers,
that all government workers are yapping incessantly about being paid less than
market rate when using total compensation instead of just salary (combined
with the previous assumption: as opposed to just the ones that are currently
underpaid), and that only the workers are benefiting (or that they benefit
much more than the city) from such a deal.

On a side note, it's disappointing to see people want to drag the public
sector workers down to a their (possibly only just perceived) lower level
instead of wanting to drag themselves up to the public sector workers' level.

~~~
zo1
_" That's how capitalism works (under ideal conditions). Everyone tries to
make the best possible deal for themselves, not just politicians."_ Well, the
common tying nature between capitalism and what I we're describing there is
human nature. Which, I would say, has strong under-currents of greed. The
difference between the thing we're discussing and capitalism/free-market is
that in the latter, greed can't manifest it's ugly head with absolute state
power. It's tempered by being required to provide to the rest of society a
valuable good/service, that they request.

 _" The second may or may not actually be a problem depending on the terms at
which the city borrows the money. Regardless, that's also not related to
pensions specifically, since the city can borrow money at stupid terms from
anyone, not just the pension fund."_ Well, I'm not sure about borrowing as
such. But I was referring to politicians/finance committees using up the
capital in pension funds, and then having to pay pensioners their pension
yearly from new tax-money that comes in. So in essence, they destroy the
buffer and end up just siphoning new funds into pensions that start maturing.

 _" Over the years since then, private corporations have lowered the salaries
they pay (usually by not keeping up with inflation as opposed to actual pay
cuts, though that happens, too) most of their workers, so public sector jobs
have become much more competitive."_ That may be the case, I haven't looked at
the raw data to refute that. But I'd add that perhaps the corporations lowered
the salaries because of a slouching/badly performing market. In which case
it's the rest of society that is subsidizing the now-cushy jobs of the public
sector. On top of having to deal with their (possibly) under-paid jobs in the
private sector.

 _" I have a few problems with many of the implicit assumptions in this
statement; specifically that there is an agreed upon way to value a pension,
that there is an agreed upon way to value the value of the risk-mitigation of
a pension plan, that there is little variation in the ratio of the total
compensation public workers earn to a market rate salary across all government
workers, that all government workers are yapping incessantly about being paid
less than market rate when using total compensation instead of just salary
(combined with the previous assumption: as opposed to just the ones that are
currently underpaid), and that only the workers are benefiting (or that they
benefit much more than the city) from such a deal."_

I agree with you to an extent on this point. We are making a lot of
assumptions in this discussion, and we're clumping together disparate values
to attempt a comparison. I'm probably not the person to debate with on the
finer details because I will interpret most of these things from my anarcho-
capitalist viewpoint of the state. So to me, generalizing things to what they
actually are is much more meaningful than endlessly comparing apples and
oranges within the complicated framework of the state.

 _" On a side note, it's disappointing to see people want to drag the public
sector workers down to a their (possibly only just perceived) lower level
instead of wanting to drag themselves up to the public sector workers'
level."_ There are probably multiple things at play here regarding peoples'
opinion of public sector workers. To me, at least, I see them as leeches of
the state. They represent a class of individuals that are permanently
dependent on leeching the benefits given to them by the state. They will fight
tooth and nail for the benefits that they get from the state, to the detriment
of society by preventing a possibly different form of governance from
emerging. Now, don't get me wrong, these are probably good people that don't
deserve to have their livelihood yanked from underneath them. But I am forced
to acknowledge the fact that change is very very difficult because we have so
many people reliant on (what I would view) very unnecessary benefits.

------
hudibras
Guys, guys, I hate to break this to you, but I think Forbes picked an example
that may not be representative of the typical government pension.

I'm not saying that I disagree with the _North County Times_ of Carlsbad,
California, but I think that most government pensions are not that generous.
$30K/year is more likely, and those employees may not be entitled to Social
Security benefits either.

[http://www.cepr.net/index.php/op-eds-&-columns/op-
eds-&-colu...](http://www.cepr.net/index.php/op-eds-&-columns/op-
eds-&-columns/pension-theft-class-war-goes-to-the-next-stage)

[http://money.cnn.com/2013/07/23/retirement/detroit-
pensions/](http://money.cnn.com/2013/07/23/retirement/detroit-pensions/)

------
ajtaylor
The article and discussion here left me wondering what will happen when some
of the public pension funds inevitably start to default on their obligations?
Based on the amount many states need to invest every year, an amount which
they don't have and can't reasonably get via taxes/fees, I think it's only a
question of if, not when.

