Calculating the combined value of San Diego’s two pension plans
EDITOR’S NOTE: Today I’m pleased to welcome Richard Rider as a regular blogger. His San Diego Tax Fighters watchdog organization has saved local taxpayers billions of dollars over the years, and he has a special interest in the public employee pension issue which has caused the City of San Diego such financial pain. He always has something interesting to say and an interesting way of saying it. I hope you enjoy his periodic posts. — Jack Dean
AS A CITY, San Diego is unusual — almost unique — in that it provides its “general” city employees (all but police and firefighters) with not just one, but TWO FULL MATCHING PENSIONS. In addition to the traditional government defined benefit (DB) plan common to all cities, San Diego also provides such employees with a 401k-type, defined contribution (DC) plan — their SPSP plan. These employees must put in a minimum of 3% into their earmarked account, and can put in more up to set limits (see Excel spreadsheet). Whatever they put in, the city will match dollar-for-dollar. This spreadsheet is designed to show the combined value of these two benefits.
This spreadsheet includes the salient variables that allow “what if” modeling. But it is not capable of handling all payout options and situations. It is intended to show the value of the two pension plans in a scenario that people can understand.
To simplify the projection, this spreadsheet presumes that the city retiree opts to annually pull from SPSP only the amount earned each year — leaving the principle untouched. Of course, there are many withdrawal options for more or less amounts, but that’s beyond the capability of this projection.
Under this assumption, the SPSP principle remains intact. When the employee finally dies, that principle is then paid to his or her selected beneficiaries. The amount of that final payout (usually in the form of a lump sum IRA) can be found under “SPSP Cumulative Value” for the year of the employee’s retirement. It’s a tidy sum, to put it mildly.
City retirees cannot start withdrawing from SPSP prior to 59.5 years of age (like IRAs, etc.) without tax penalties. But if they retire before 59.5, the funds in SPSP continue to earn. For instance, if the employee retired at age 55 but didn’t start pulling from SPSP until age 60, the value of the SPSP account and the resulting value of the percent withdrawal would have increased 46.9%, assuming an 8% average annual growth rate.
After age 70.5, the retiree must start some minimum withdrawal of principle from the SPSP account, according to IRS formulas. But this decrease in the principle of course translates into increased payouts, so for evaluating the value of the two pension plans, this spreadsheet does its job.
The DB plan payout is figured using the common DB formula that calculates the payout as follows: the number of years worked, multiplied by a percentage factor, multiplied by the highest annual salary paid.
This “percentage factor” varies with retirement age, increasing in stages from 2.5% at retirement age 55 to to 2.8% at 65 or later. That variation in the DB payout depending age is calculated by this spreadsheet.
The DB pension is limited to 90% of highest salary. In this spreadsheet we presume that the highest salary is the last year’s salary. The spreadsheet limits the DB payout to 90% of that salary.
A word of caution: This is an unofficial projection. It is not sanctioned by the city. It’s based on the best info we can get from the city. And it is prepared by someone known for being a longtime critic of excessive public employee compensation.
But this spreadsheet in various forms has been made public since July 2005, and so far no one has come forward to dispute any substantial aspect of this projection. Surely it can be picked at, but as a measure of the stunning combined value of the city’s two pension plans, it appears to adequately serve its purpose objectively and accurately.
Constructive criticism is more than welcome!
Richard Rider, Chair
San Diego Tax Fighters
Email: RRider(at)san.rr.com