This should not come as a surprise for a country that continues to experience an expanding government role in the daily lives of its citizens. According to Forbes columnist Rich Karlgaard the answer to the question above is: Police officers, firefighters, teachers and federal bureaucrats. Here’s why:
It’s said that government workers now make, on average, 30% more than private-sector workers. Put that fantasy aside. It far underestimates the real figures. By my calculations government workers make more than twice as much. They are America’s fastest-growing group of 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. Investment pros such as my friend Barry Glassman say 4% is a good, safe return today.
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.
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 age 50. As the North County Timesof Carlsbad, Calif. explains: “Carlsbad offers its police and firefighters a ’3-percent-at-50′ retirement plan, meaning that emergency services workers who retire at age 50 can get 3% of their highest salary times the number of years they have worked for the city. City officials have said that in Carlsbad the average firefighter or police officer typically retires at age 55 and has 28 years of service. Using the 3% salary calculation, that person would receive an annual city pension of $76,440.”
Who are America’s fastest-growing class of millionaires? They are police officers, firefighters, teachers and federal bureaucrats, who, unless things change drastically, will be paid something near their full salaries every year–until death–after retiring in their mid-50s. That is equivalent to a retirement sum worth millions of dollars.
If you further ask how much salary it would take to live, save and build a $2 million stash over a 30-year career, the answer would be somewhere close to $75,000 more than the nominal salary, if you include all the tax bites associated with earning, saving and investing money.
In other words, if a police officer, firefighter, teacher or federal bureaucrat is making $75,000 a year he or she is effectively making twice that amount. Implied in the annual pension payout is that the individual diligently saved half of his annual salary–after taxes–in order to save, invest and build (again, after taxes) the near $2 million pot.
So when you hear that government workers now make, on average, 30% more than private-sector workers, you’re not getting the full story. Government workers, on average, make more than twice as much as private-sector workers when you include the net present value of their pensions. How long can this last?
Reprinted with permission from Economic Policy Journal.