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Clay Russell

How to Get a Pension in 7 Easy Years

[Publisher's Note:  We are pleased to offer this column from longtime FR friend Clay Russell.  A Los Angeles based writer, Russell served as Special Assistant to Governor Arnold Schwarzenegger from 2003-2010 - Flash]

“Pension reform” and “unfunded liability” are hardly phrases that turn up in most people’s dinner-table conversations. On the contrary – these are topics that, if examined closely, would more likely ruin a person’s appetite.

I was a political appointee in the Schwarzenegger administration for almost seven years. When I left that job I had a state pension coming to me…for life. Based on rough estimates, I would receive, starting as early as age 55, something in the neighborhood of $800-1000 per month, even more if I waited a few years to start collecting. This isn’t enough to live on but it’s significant when you consider that it’s for life.

It’s perfectly possible for an individual to buy an annuity that will pay a guaranteed amount after a certain age. A financial planner did some quick math recently and told me, based on my age and a target monthly payment of around $1000, that an annuity as generous as my State of California retirement plan would have cost me a lump sum of $300-400k. Yet my total contributions to CalPERS (the state retirement system for public employees) were only about $20k. The difference between the amount I paid into the system and the real cost of my pension is the simple definition of “unfunded liability.”

Whether I deserved a juicy pension for my few years on the state payroll is arguable, and it’s a subject being discussed more and more as the state and cities are facing higher and higher costs related to employee pensions. Estimates for pension liability in California alone range into the hundreds of billions of dollars, and that’s money that will have to come from somewhere: schools, prisons, aid for the needy, public safety. And don’t forget that tax increases are always an option.

A perfectly sane response to my story would be, “That’s crazy.” But there’s been far too little discussion in Sacramento about changing the system. Governor Schwarzenegger made an earnest try, even if just to tweak things, and he was swatted down. Push the retirement age back from 55? No way! Increase the employee’s share a little? Not on your life!

Governor Brown signed AB 340 into law last year, at least taking a chisel to the iceberg of future debt. But complaints came from both sides of the aisle. “Not far enough,” “slippery slope,” etc.

The forces that oppose change to this precariously unbalanced system are considerable. Union leaders, quite reasonably, want to preserve every possible benefit for their members. Legislators must answer to the people and the groups that keep them in office. The status quo in California state government is a massive, monumental being unto itself – a monster, some would say.

And so, the unfortunate reality is that “pension reform” and “unfunded liability” are going to have to become a part of our dinner-table conversations. We all must assume more responsibility for the way our collective bank account is managed.

Full disclosure: I fudged my numbers a little. I worked for the government for a bit less than seven years but I contributed to CalPERS only for 5½ years. I thought enrollment was automatic (it wasn’t) so I missed out on the credit I’d otherwise have received for that first year or so. I earned a lifetime pension for 5½ years of State of California employment.

Final disclosure: Something smelled funny to me about the whole system and I didn’t like being part of California’s pension burden, so I cashed out. I took out just the money I had put in, plus interest, and I gave up my pension.  It’s a drop in the proverbial bucket but I sleep better.