Some California City Worker Pension Economics

The New York Times has reported a story on Puerto Rico's fiscal challenges.  The area has a large deficit and a large part of this is due to allowing workers to retire on a generous pension plan at roughly age 50.  Using my micro data from California, I'd like to teach you a few facts about generous public sector pensions.  I use these data in this recent NBER Working Paper.

For 214,026 California workers in the year 2015, I know that they work for a city government such as Santa Monica and I know the youngest age they can retire at and their pension terms.   I use these data to calculate the empirical distribution of pension generosity.  So, look below;  the 50th percentile of the distribution (the middle or the median) can retire at age 55!  Are you eligible for that perk?    10% of the public sector workers can retire at age 50.

When these workers retire, they are eligible for the rest of their life and their spouse's life to receive a defined benefit payment.  Permit me to explain. Suppose your highest salary as a cop is $80,000 and you work for 30 years and retire at age 55.   If your pension plan is a 2% plan, then you would receive 30*.02 or 60% of your $80,000 salary as an annual defined benefit annuity.  So, your annual payment until you and your spouse both die is;  $48,000.  Given increased life expectancy, the state could be paying this flow out for 30 years or longer.

.
                          retireage
-------------------------------------------------------------
      Percentiles      Smallest
 1%           50              5
 5%           50              5
10%           50              5       Obs              214026
25%           55              5       Sum of Wgt.      214026

50%           55                      Mean           56.22377
                        Largest       Std. Dev.       3.94896
75%           60             67
90%           62             67       Variance       15.59429
95%           62             67       Skewness      -.5457838
99%           62             67       Kurtosis       12.89774


My data set also indicates how generous the public pension in California is for different public sector workers.  The median worker receives 2.3% of his highest pay per year of service.  10% of the workers receive 3% per year; so a worker with just 25 years of service would receive 75% of his highest salary as a defined benefit pension.

                           percent
-------------------------------------------------------------
      Percentiles      Smallest
 1%            2              1
 5%            2              1
10%            2              1       Obs              224479
25%         2.16              1       Sum of Wgt.      224479

50%          2.3                      Mean            2.41739
                        Largest       Std. Dev.      .3617814
75%          2.7            3.5
90%            3            3.5       Variance       .1308858
95%            3            3.5       Skewness        .205287
99%            3            3.5       Kurtosis       2.366788

Why does this matter?  The California pension fund promises to payout this enormous set of defined benefit promises but it must invest money and earn an uncertain rate of return to pay this.  I do not believe that Calpers is earning 7.5% each year on its investments.   The defined benefit plan in California is likely to become less generous in the near future.  Will this mean that California local government will attract worse workers?  Will California government be less competent in this case? Stay tuned.