Three reasons most ‘average’ pension amounts mislead
Editor’s note: This article was originally published by Union Watch. While the focus is on California’s public pension systems, the same factors that create misleadingly low pension amounts in California may well exist in Nevada. The California experience provides a warning for those in Nevada looking to cite average pension amounts.
Public pension systems in California, most notably CalPERS and CalSTRS, often cite their average pension payout as evidence that their pension benefits are reasonable. Also, many defenders of public pension plans attempt to use these averages to counter evidence that pension benefits have become excessive in recent years.
The following are three very important factors to consider when computing a raw average and then using this value as an indication of what public employees receive in retirement benefits. These are three reasons that “average” pension amounts are often artificially — and inaccurately — low.
Reason 1: Not adjusting for years of service
The biggest and most widely documented factor is ignoring years of service. Most analyses of average benefits include the implicit assumption that the pension benefit cited is for a full career (30 years or more) of service.
Including the pension amounts of those who have not worked a full career produces an average value that is much lower than what those who have worked a full career are receiving. Since a full-career employee is the benchmark used in measuring the equity of pension benefits, it is only appropriate to use the data that reflects that.
Reason 2: Not accounting for beneficiaries
Many pension plans maintain their records in a way that makes the most sense for processing payments, but are incredibly misleading when used to calculate average pension amounts. The case of beneficiaries is a prime example of this. When a public employee qualifies for a pension, there are set guidelines for each plan depending on how beneficiaries are treated, but most plans default to the surviving spouse. In many cases, the retiree can designate additional beneficiaries as well.
So when calculating average pension amounts, if beneficiaries aren’t accurately identified and segregated from active service retirement amounts, the resulting average will be skewed downward. This is because any beneficiary payment will always be a portion of the full retirement amount, which will be incorrectly treated as if it were its own separate benefit amount. An example found on Transparentcalifornia.com illustrates this effect.
In the San Jose Police and Fire Pension Plan, there is no distinction between beneficiary and active service retirees. Consider, however, the following case of multiple beneficiaries. An individual with a retirement year of 2007 and years of service value of 25.02 received a $76,120.10 pension amount in 2013. Two more entries share the last name of this individual, as well as identical years of service and year of retirement but both only received $7,100.32 in 2012. As it is inconceivable that a San Jose police or fire retiree could retire with 25 years of service and receive an annual pension of just $7,100, these three separate entries – $76,120, $7,100, and $7,100 – are all components of one pension. So in this case, a $90,320 pension would be treated as roughly equivalent to three pensions of $30,107, a reduction of nearly two-thirds of the true pension amount that is given three times the weight of other pension amounts, if someone computed a raw average of the plan as a whole.
Reason 3: The same pension amount is reported in fragmented parts
Another potential error is when one employee’s pension is reported in fragmented parts. This could come from a divorced spouse receiving a portion of their pension or even in cases where the retiree changed departments and received a pension amount under two or more different formulas. As indicated above, when calculating an average, this reduces the pension amount by at least 50 percent, while giving this pension the weight of two or more entries, which lowers the raw average.
While it makes sense for pension plans to keep their payroll records in the format that is most efficient and accurate for them, it presents challenges for those citing “average” pension amounts. It is the responsibility of anyone who uses pension averages in their arguments, either for or against pension reform, to use accurate data that faithfully represents the point being made.
As demonstrated above, there is much more to calculating average pension amounts than it appears at first glance.