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The Millionaire Cop Next Door

forbes.com

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Re: The Millionaire Cop Next Door

#31

Post by patio11 »

Ntrails wrote: post #30
patio11 wrote: post #14

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…

I am thrilled that you're able to design a risk free portfolio returning inflation + 4% annually. Please share this with the rest of the world, that we may all have better annuities... People massively undervalue pensions - especially those with additional benefits such as spousal, early retirement, minimum payment periods etc. The only valid valuation for any asset remains what it would cost in the market, and as su…

Let me try rewording my explanation: an annuity which pays $80k from the day you retire until you and/or your wife die is a product which you can buy from many providers (typically insurance companies, because they're going to make this bet in parallel with enough people such that variations in length of the annuity get smoothed out by actuarial reality).

This product has a negotiable price tag. You will find quotes for this product to be approximately $1 million, not $2 million.

[Edit: P.S. Most HN users should not buy annuities. Ask me, or a fee-only financial adviser, later if you want to know why, but the short version is "They optimize for emotions but you have the compelling alternative to optimize using math."]

Re: The Millionaire Cop Next Door

#32

Post by cmdkeen »

dalke wrote: post #24
nilsimsa wrote: post #13

Earlier quoted context omitted.

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

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 othe…

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.

Re: The Millionaire Cop Next Door

#33

Post by 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.

Re: The Millionaire Cop Next Door

#34

Post by vdaniuk »

noname123 wrote: post #4

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…

"Police officers... provide a valuable and concrete service to the community".

Ha-ha. Sad laughter. Some police officers contribute immensely to the society. Others, and many of them, take from society to satisfy their personal sociopathic, power-hungry tendencies. Blue wall of silence exists for concrete reasons: corruption in the police force.

So I don't think its great that senior police officers who may or may not covered the crimes done by their colleagues are rewarded by six figure pensions.

Re: The Millionaire Cop Next Door

#35

Post by Ntrails »

patio11 wrote: post #31
Ntrails wrote: post #30

Earlier quoted context omitted.

I am thrilled that you're able to design a risk free portfolio returning inflation + 4% annually. Please share this with the rest of the world, that we may all have better annuities... People massively undervalue pensions - especially those with additional benefits such as spousal, early retirement, minimum payment periods etc. The only valid valuation for any asset remains what it would cost in the market, and as su…

Let me try rewording my explanation: an annuity which pays $80k from the day you retire until you and/or your wife die is a product which you can buy from many providers (typically insurance companies, because they're going to make this bet in parallel with enough people such that variations in length of the annuity get smoothed out by actuarial reality). This product has a negotiable price tag. You will find quotes…

I can't really comment on the US annuity prices, as I am based in the UK - but I find it unlikely that an $80k annuity at 55 is purchasable for a million dollars given where yields are atm. I mean cripes, right now you would be lucky to find a 5k inflation linked joint life-annuity with 100k retiring at 65.

The annuity market is in no way optimised for emotion. It is priced based on capital retirements, mortality numbers, longevity trends, investment returns, bond yields, and a bunch of other things - before you even get to the insurer then trying to be competitive in the market. You are buying insurance. Same as medical insurance, plenty of people get less than they pay in - that's the whole point. Risk pooling means redistribution of wealth, always.

If you want to run the numbers on drawdown and argue it's better than annuitisation, feel free. Just make sure you price in your 40% drop in equities scenario.

Re: The Millionaire Cop Next Door

#36

Post by Ntrails »

anifow wrote: post #28
patio11 wrote: post #14

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…

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

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 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%.

Re: The Millionaire Cop Next Door

#37

Post by zo1 »

joshAg wrote: post #29
zo1 wrote: post #26

Earlier quoted context omitted.

" > 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.

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 t…

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.

Re: The Millionaire Cop Next Door

#38

Post by zo1 »

breakend wrote: post #10

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 suc…

"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.

Re: The Millionaire Cop Next Door

#39

Post by zo1 »

noname123 wrote: post #4

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…

"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."

That would be great and all if the money to pay for these things wasn't being taken out of your unborn children's unearned earnings. Eventually it'll pop, and all the good we gained by paying "public servants" big pensions will vanish as the rest of society crumbles paying untold debts that they never had a decision in.

Re: The Millionaire Cop Next Door

#40

Post by dragonwriter »

patio11 wrote: post #15
declan wrote: post #12

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... "The st…

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…

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.)

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