No New Taxes Before Pension Reform Dumbass

Wages And Pensions Public vs. PrivateIn my fiscally irresponsible state of California, Governor Jerry Brown (D) is proposing raising taxes on people making over $250,000 a year.  According to the SF Chronicle, 65% of those polled believe this is a great idea.  Well No Duh useless poll and uninsightful newspaper.  Most people or households don’t make more than $250,000 a year so of course they’d be for raising taxes on those income earners!

In fact, less than 5% of the population makes more than $250,000 a year, so why don’t 95%+ believe this is a great idea?  The reason is because Jerry Brown has also proposed raising the sales tax by another 0.5%!  Uh oh, suddenly since everybody has to pay for an increased sales tax, not everybody is for it!

Hey, what’s a 10.5% sales tax rate from the 10% now?  At least you have a choice in paying taxes, whereas if you are making above a certain income level, you don’t.  Let’s just raise sales taxes to 20% since rich people have a lot of money and buy way more things they don’t need anyway!

WHY ISN’T THERE PENSION REFORM?

I’m perplexed why the California government wants to raise taxes on all its citizens, but isn’t willing to reform their own pensions?  Is this not a double standard?  If the government really wants to help the schools, public transit, roads, and other state infrastructure, shouldn’t they reform one of the biggest fiscal burden in the State?

All the State has to do is lengthen the retirement age or increase the age at which someone can receive a pension.  You can retire at 50 if you want, but you’ll still have to wait 15 years until 65 to collect your pension, for example.  Pretty easy stuff.  The private sector doesn’t even have a pension, just a woefully inadequate 401K plan which one can only contribute $17,000 of their own money a year starting in 2012.  I doubt many private sector employees under 40 are expecting to receive their Social Security retirement benefits either.  Contrast that with tens of thousands of dollars of pension income for life, and it’s clear the dichotomy is huge.

Oh crap, I realize why there’s no pension reform.  Those making the laws are state government employees with pensions!  Why on earth would they be willing to sacrifice their own money for the good of the country, when they’ve sworn an oath to do what’s right for the State?  Silly me.

TIME TO UNDERSTAND THE NICE BUCKS

The average California state and local government employee makes $68,500 according to the 2008 US Census Data, while their average pension is $45,700.  Meanwhile, the average private sector employee wage is $46,500 vs. an average Social Security paycheck of only $15,000 a year with no pension.  The pension is literally triple the benefits received by the private sector employee!

Furthermore, the typical government employee works from 25-55 years old and then retires for 30 years while the private sector employee works from 25-65 years old and retires for 20 years.

There are more than 9,000 beneficiaries of CalPERS, the largest state retirement plan, who receive more than $100,000 a year.  That’s right, $100,000 a year+ for the rest of your life at a cost of $1 Billion+ dollars annually for this organization alone, and there are many more!

In other words, a State employee not only makes more while working, gets more while retired, and works for less amount of time!  Hook a brother up!

NOW YOU KNOW

Since everybody likes to spend other people’s money to fix the system and not their own, now you know why it is wrong to give people the power to raise taxes on others without paying more taxes themselves.

If you are a high income earner, usually defined by the government of $200,000 and above, you will always be screwed, even in a democracy thanks to mathematics.  You will be in the minority by nature due to your income, and everybody will want to get their hands on your money by voting to redistribute your wealth.

You must never, ever disclose how much money you make as a result.  In fact, if you can defer as much money as you can while living in a high income tax state or country, and receive distributions after you move, the better!  It’s important to pretend you are poor so nobody comes after you.  If the very government isn’t willing to make some sacrifices to help balance the budget, why should you?

Recommendation: I’ve been using H&R Block’s Premium Tax Software to do my own taxes for the past 11 years. It’s inexpensive and very easy to use for novice to advanced tax filers. The software always updates with the latest tax rules so you’re never behind. They also have audit protection service as well.

Regards,

Sam

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. JR says

    Here in MI, the one good thing our new governor implemented was the lifetime cap on welfare benefits. Of course there are some vary specifics to the limits, but it was a positive step. Both my wife and I have contact w/ recipients, though in different contexts. Generally speaking, I just cannot say much, if anything, to dispute the stereotype. Of course there are outliers, as with anything.

    Otherwise, our governor is taking away from education, front-line workers and everything else that all the other states seem to be cutting. A problem here seems to be the Big 3 and manufacturing. It seems to be difficult for us to change from what we’ve always done to something more effective and technologically savvy. For many it seems difficult to get out of the box.

    I hear many people complain of similar things, yet doing little to change or improve. Mention education or a change in thinking and one gets a deer-in-headlights stare. Or a rant as to how ‘they don’t want you to do that”, how impossible it is to change anything b/c banks are taking the money, big business is swallowing everything, government is taking what isn’t nailed down….

    I agree w/ you, Sam. We keep hearing about “shared sacrifice”- I’d like to see politicians “sacrifice” their pay increases, insurance, pensions, travel, et al that We the People fund. I think that between politicians and the (needless) welfare class those are probably two of the biggest tax burdens we carry on a state/Federal level. Just a hypothesis, I haven’t actually looked.

    • says

      JR, thanks for sharing the perspective in Michigan. I cant see the big 3 union every breaking up.

      It’s not like the auto union folks did anything wrong. They grew up with the promises of a pension. Unforunately, the world got that much more competitive.

      I just want to see our politicians show some sacrifice for once.

      • JR says

        It seems the politicians both at the state and federal level keep talking about sacrifice, but few seem willing to share in that sacrifice. Our state workers (who contribute to a 401k) have been ‘asked’ to give up more and more on the one hand while being tasked w/ more on the other.

        I am with you in liking to see our legislators put some action to word. I know that our local politicians could do w/ not receiving any pay from taxpayers. They have independent incomes outside.

        If each state were to operate on a simple business model, wouldn’t that at least begin to put them into a better place? Realizing of course there would have to be a decent Board.

  2. says

    I live next to Illinois and their budget battles flow into our state. Luckily, the nonsense flows only via the news. We have a budget surplus, though a state income tax I think is unfavorable, and sales tax which is middle of the road. Then again, I suppose a surplus is better than a massive deficit, especially a deficit from pensions.

    IL is royally screwed – and that’s really all there is to it.

    This might give you an idea of how ridiculous the pension system is in IL: substitute teachers who taught one class for one day were allowed to enroll in the pension system. Oh, those teachers, by the way, were union activists. Alongside that you have the problem that teachers are pulling down both state and union pensions as teachers and activists, thus “double-dipping” in the trust funds set up to finance the system.

    Really, I wish more states would embrace a similar deal like our state, where contributions are privatized just like a 401k/IRA. If you get a great return on your money during your tenure, awesome, more money for you. If you don’t, sorry – I don’t see why the people of the state should play backstop for you.

    I have investments and savings. No one is going to guarantee my returns, yet I have to guarantee that someone else gets (recently) above-market returns? No thanks.

    Pensions should go the way of the dinosaur. Future returns are impossible to predict and therefore it is dangerous to create a systemic risk for the citizens of an entire state for the benefit of a single group.

  3. says

    This morning, I was having an IM argument with a coworker who actually has no problem with giving to social security and possibly not getting a dollar of it back. She said “oh, I forgot you think like a republican”. What the hell does that mean? I said I have a problem with investing my money in something I don’t trust. This post is a perfect example of why I don’t trust government. She replied that she does trust the government, so she has no issues.

    We had to agree to disagree…

    • says

      I love ignorance. People really are blissfully ignorant. They trust the government wholeheartedly and then complain when things don’t go the way they should. The irony is hilarious. More government = more socialism. Unfortunately, many people are getting their lack of critical thinking skills from the schools that are sponsored by the same evil. All you CAN do is agree to disagree with their lack of intelligence.

  4. says

    I live in Tennessee where we don’t have a state income tax and the government is required to have a balanced budget. I think it works out great because they are forced to match the spending to the income thats coming in and things don’t easily get out of hand like they do in other states.

  5. says

    $200,000 might be the line now, but we can inflate our way into $200,000 being the average income! I’m pumped, let’s inflate and capture more income in our tax trap? Who’s with me!

    Anyway, you know I’m a stats geek. I do think the state/private comparison is wacky – but (I think) state employees have a higher proportion of college degree holders. It doesn’t explain the whole gap (I’ve looked at the normalized numbers and they aren’t pretty), but it does cover some of it. That said, pension obligations are growing to the point where they are becoming the largest part of the budgets of many states… and it’s easy to do when you assume 8-10% returns (no private company would get away with the crazy return projections states do).

    Well, hopefully we smack down any tax increases. I’m with you on this one – I’ll be voting no on Jerry’s plan. I’m hoping that it’s just a feeler so he can take the ‘mandate’ and work on reform. You never know with Brown – he’s crafty, I’ll give him that.

    • says

      Very good point about the likelihood that more state employees have college degrees, and may therefore be underpaid relative to their private peers. I can see that.

      I do believe private sector like for like pays more. However, once you capitalize the guaranteed for life pension, those who do get these pensions blows the private sector employee out of the water.

  6. says

    I live in California and my current job focus is on legislative affairs. Coincidentally, I’ve been tasked with focusing on pension reform. I completely agree that there needs to be pension reform–however, the state is essentially tied because of the way the law is written. Currently, CalPERS law states that benefits can only be ADDED and not taken away. It’s a form of contract. So any changes made to pensions would only be able to take effect with NEW employees. and California wouldn’t feel the benefits for YEARS until those new employees retire. I think there will definitely be a fight in the upcoming years to try to reduce or change benefits promised, but it’s unclear at this point how successful they will be.
    I, personally, don’t mind seeing cuts to state services in order to avoid taxes. It’s not that I don’t think these cuts would impact me, it’s that I don’t think we have a revenue problem–we have a spending problem. And I’m tired of hearing all this doom and gloom when the state has been increasing spending for YEARS and never been able to get a handle on their budget. The rest of America has had to downsize–why can’t California?

  7. Mark says

    I’m not sure why you compare CalPERS to Social Security since both the pensioner and the private employee are getting Social Security. Better to compare it to a private 401(k) plan in my opinion, which state employees don’t get the benefit of. The typical state employee is paying 5-10% of their salary into their pension plan and pulling a measly $45k out of it? Compare that to putting away 10% of your salary in a 401(k) with a reasonably generous employer match and you could easily be getting double what they pension plan pays (assuming 35-40 years in the system). THIS is why CalPERS needs to be reformed, it provides pathetically poor benefits for way too much cost to the taxpayer.

    • says

      Who is comparing Calpers to Social Security? You got your SAT analogy wrong Mark.

      You sure State employees can double dip by receiving full Social Security benefits and their State pensions? Sounds pretty awesome if so.

      Check my site for the average employer 401k match. It’s like $3,000. You’re saying $17,000 of your own money plus $3,000 from your company to survive on until it runs out is better tha. A $45,000 pension for life (30yrs in average until retirement)? I hope I’m not understanding you correctly.

      NPV that $45k, 30 year pension stream.

  8. says

    As a teacher, I contribute to my pension (8% a year) instead of Social Security. This is true of all California state workers. There is some matching from the state as well. This is no different from Social Security except at a higher rate. The pension itself has done fairly well in these bad times. Is the pension liability killing the state budget? It probably will! There are other parts of it such as allowing employees to work overtime in their last year to boost theri retirement. Police, Fire and others have historically done that. In my case, I have worked 11 years and only received one (1) raise. My pay still increased according to the salary table because of longevity and classes I took. The pension to some extent is one of the only bright spots for a retiree who works for the state. Do some scam the system and take advantage of things? The city Manager for Bell is a good example.

    • says

      Thanks Larry. To clarify, you are not eligible for SS if you have a pension, or likely a modified version of SS depending on what you did before being a teacher?

      IMO, teachers need to be paid more.

      • says

        I have no Social Security deduction! I contribute 8% to CalStrs through a payroll deduction. All Californoa teachers do the same. When I retire, I will collect a pension from (CA) and Social Security. If I were a teacher my entire career, I would only have a pension. I still contribute to Medicare though. In essence, I pay higher taxes than you do (not counting income tax).

  9. says

    Here in NJ, not only do we have the pension issue we have the sick leave issue. Some workers accrue sick days over many years then cash out when the retire. The sick days accrue like and investment plan, e.g, the sick day you didn’t take 20 years ago get paid out at today’s wage.

    It’s not uncommon for workers to leave with 5-6 figure pensions along with a 5-6 figure sick leave lump sum payout.

  10. says

    This stuff makes my head spin with anger. Why is the government the insurer for these pensions?! Fine they made promises to all those government workers in the past. CUT IT ALL OFF.

    Pick a date and EVERYONE hired after does not have a government backed pension, want to make a bet that people would still apply for those jobs?! There is no F’in reason why there should be a 2 to 3 year waiting list to be a cop on Long Island (Nassau/Suffolk).

  11. says

    Raising taxes is like boiling the frog, except we’re the frog. We won’t feel the heat until it’s far too late.

    I live in Texas. We don’t have ANY problems here. Just ask Mr. Perry.

  12. says

    Like Krantcents, I contribute to a teacher’s pension and not social security. However, I have contributed to SS in the past. As I understand it, when I do retire, there’s a formula for determining if I get any of my SS that I’ve paid in. In my case, I probably won’t since I will have contributed to my pension for many, many years vs. only ~15 with SS. The only bright spot for teaching (at least financially) is the pension!

  13. skrpune says

    I live in IL, and with my husband working as a prof for a state school, we’re in a similar situation to Krantcents and Little House – no SS deductions so no SS payments come retirement time, and at the time of employment, he had to make a lifetime choice between payroll deductions going to either a 403b or a pension. Doing the math, the pension works out better and is guaranteed payout (should IL not totally default or dip fully into the pension fund by the time hubby retires). IF that pension is there when he retires, yes, it will be a nice annual retirement salary, and it will hopefully make up for the very low pay that he gets as a state prof compared to working in the industry or working for a private school. But we’re not betting on the IF and I’m contributing as much as I can to my 403b and to each of our IRA accounts just in case that pension goes POOF. I think people DO tend to forget that state employees do actually pay into a pension, and many of them are getting paid less by the state than they would be paid in they were to work in the private sector. State employees are also subject to mandatory unpaid furlows should their employer run into money troubles…

    What I have an issue with is double-dipping of pensions – folks who work one state job and retire and get a pension AND THEN go to another state job and draw salary & pension from that as well. Just smells bad.

  14. says

    Love this topic. I’ve done quite a lot of research on the Virginia Beach City Pension and Retirement plan. It’s called an outlier plan and is well known as one of the best (for beneficiaries) in the country.

    Decades ago, when all cities and counties were reforming their pensions and mostly transitioning to self-funded programs, along the lines of the 401(k) and 403(b), VB went the opposit direction. Retirees now earn 51% of their base pay for life, without having to contribute ANYTHING to the plan.

    The benefits get better. A police officer friend who recently retired is not required to draw SS because his contract stipulates that the City will pay his SS entitlement until he reaches full retirement age of 67, thus ensuring he receives the maximum payout at that time and for life.

    No wonder the City is running deficits! Pensions are unsustainable for everyone, unless the age of mortality rapidly declines.

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