Could Gov't Workers be Fastest-Growing Set of US Millionaires?

This recent Forbes article is of the sort that should be taken with a grain of salt… tales of everyday police officers, firefighters, and teachers becoming millionaires due to lavish public pensions – even in these days of government excess – still sounds a bit unrealistic.

Yet, even with a grain of salty flavoring… there’s probably also a grain of truth. Although many types of defined benefit pensions have themselves been retired in favor of the defined contribution sort, the government still has to service deals struck going back at least a generation. How much will that cost?

According to Forbes:

“By my calculations, government workers make more than twice as much [more than private sector workers]. Government workers are America’s fastest-growing millionaires. Doubt it? Then ask yourself: What is the net present value of an $80,000 annual pension payout with additional full health benefits? Working backward, the total NPV would depend on expected returns of a basket of safe investments–blue chip stocks, dividends and U.S. Treasury bonds…

“…Based on this small but unfortunately realistic 4% return, an $80,000 annual pension payout implies a rather large pot of money behind it–$2 million, to be precise. That’s a lot. One might guess that a $2 million stash would be in the 95th percentile for the 77 million baby boomers who will soon face retirement.

“That $2 million also happens to be the implied booty of your average California policeman who retires at age 55. Typical cities in California have a police officer’s retirement plan that works as follows: 3% at 50. […] That does not include health benefits, which might push real retirement compensation close to $100,000 a year.”

This Forbes article provides some useful perspective on pensions. However, critiques of this article have also been thorough. First, Carlsbad, California – the “typical city” referred to — has a cost of living ranked 56 percent above the national average… meaning higher than New York City, for example. Also, police and firefighter benefits there are almost famously high (including the article Forbes cites).

Even with those concerns, when you take into consideration the fact that public employees really can on average earn “30% more than private sector workers,” generous pensions simply add to government largesse. There’s no doubt that among public workers the police, firefighters, and teachers rank among the most essential to the well being of the nation. Those positions are difficult and in many cases dangerous. However, if these employees deserve their wages, well then, compensation still has to be cut back elsewhere in the public sector… so public wages can be brought in line with what the market demands.

You can read more details in coverage from Forbes on the millionaire cop next door.


Rocky Vega,
The Daily Reckoning