Friday, May 16, 2014

What are the Fastest-Growing Classes of Millionaires in America?

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?

(via Mark Perry)

3 comments:

  1. My prediction: in the relatively near term we will see private sector retirees making $20-$50k per year from Social Security and modest retirement savings being taxed at 60% to fund the triple digit pensions of government retirees.

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    1. The thieves in the political class will throw the government employees under the bus at the first opportunity. That's why the pensions are underfunded presently, because the politicians are going to give away as little of the plunder as they can. We can see it playing out already in a number of places.

      As to Social security. Productive sector workers will get nothing. Or something that has no purchasing power. (I use productive sector, because too much of the 'private sector' subsists on government contracts, QE, etc and so on)

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  2. Here in Florida its far worse and no one reports on it. Our FF retire usually late 40's and our cops, early 50s. We have a program called the Drop where they retire but still work their job and the pension money goes into a tax deferred account that pays the same rate as the pensions estimated return rate (8% today). During the time they are in the drop they get mandatory 3% raises to their pension, they accrue more time (3% to 4% per year) which increases their annual pension (limited to 99% of their highest 5 years average, At the end of five years they have to leave and with that the average cop has well over $600k and Fire fighter closer to $900k. This money has to be rolled over into an IRA, but unlike you and me, they can take as much out of the IRA as they want with zero penalty. They do have to pay income taxes but no 10% penalty for early withdrawal. This is on top of their pension. Oh and to get health benefits for life, there is something called the heart and lung act that basically says if they have heart or lung issues, healthcare is provided for life. About a year out from going into the drop program they go to the Dr. complaining of heart issues. Even though the docs will find them healthy, if they complain for three years about heart pains, they then qualify for healthcare for life. The entire thing is disgusting. If I thought it could last, I would tell my kids to not be an entrepreneur like me, but go get a government job instead.

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