Pete’s Place Restaurant in Krebs, OK ID’d by David Tinker
I had not looked at the Oklahoma Council of Public Affairs website for a couple of weeks while preparing for a presentation on school finance so was unaware they had again ventured into the arena of Oklahoma’s public pension systems with not one, not two, but three new posts. This subject is near and dear to my heart because I receive an Oklahoma public pension system monthly retirement payment and because the OCPA’s past distorted advocacy for eliminating state public pensions is why I began vetting their so-called “research”, thereby discovering how they consistently distort or make up facts and use faulty reasoning to support the conclusions their funders and readers already believe. These three posts are no exception and its amazingly easy to expose significant flaws in facts and analysis.
I’ll begin with the first which is Retirement Provision Boosts Superintendents’ Pensions by their President Jonathan Small. It should be titled We Hope You Don’t Understand Compound Interest So You’ll Think You’re Being Ripped Off By Superintendents. I’m not sure but possibly his article is the debut of another Data Tool. Unlike their last Dat A Tool? I reviewed, this one appears to have accurate information, though I’m not sure for what public policy purpose. He leads off by telling us that retired Union Public School superintendent Cathy Burden is expected to draw over $3.1 million during retirement but only paid in $342,000, the current employee contribution rate is 7%, while conceding that “the districts that employed her contributed somewhat more.” The other facts he shares are that she retired at age 65, worked 41 years, and had an ending salary of about $270,000. So how does $342,000 become $3.1 million unless she’s ripping us off?
First, in recent years as I’ve explained before and will again in my next post, much more than “somewhat more” is being paid in by school districts AND the state being about 17% or so in recent years. So the state/employer “match” for her $342,000 is way more than double that amount, being over $47,000 just her last year.
Second, it doesn’t take $3,100,000 to provide her with 21 years (her life expectancy at 65) of benefits; at the OTRS current expected 7.5% rate of return the system’s trust fund needed about $2.16 million to secure her future payments when she retired, still a lot, but much less than the $3.1 million eventually paid out. That’s how compound interest works. If you need a dollar next year and can earn 7.5% investing, you only need 93 cents today; but if you can wait 21 years for that dollar, 24 cents today will get you there.
Third, her $342,000 and “somewhat more” than that in state/employer match has been paid into TRS and invested for over 41 years. Without replicating her exact work history here’s a plausible scenario that illustrates how steady investing along the way can get to that $2.16 million. I’m not sure but believe she and I are both TPS graduates from the sixties a year apart so she retired in 2014 and may have begun contributing in 1974. If contributions by her, her district and the state were only $1500 (on about $10,000 income) that year then 41 years later, at 10% annual growth in her compensation as she earned her way up the ladder, her final total contribution is $67,900 which is darn close to the 24% share of her final salary that was collected by TRS from her, Union and the state that last year. The total paid into the TRS trust fund on her behalf under this scenario over the 41 years is $732,000, including her $342,000 with the difference being Mr. Small’s “somewhat more” ($390,000) paid by her employers and the state.
Fourth, that $732,000 invested as it came in (nothing needs to be paid out) over the 41-year period at the long-time TRS realized rate of 8% yields a starting nest egg for her retirement of just over $2.13 million which is very close to our target $2.16 million (besides Oklahoma female life expectancy is falling). That, Mr. Small, is how $342,000 becomes $3.1 million over a lifetime with promises kept and prudent investments made. Here’s my calculations.
What has Mr. Small in a jazz is that the TRS retirement formula for us old timers is based on our highest three years compensation. As he notes that has already been changed to five years but he seems to pine for the Social Security standard of highest 35 years. He puts it like this:
OTRS members are awarded two percent of their average final salaries for each year of service. But unlike Social Security, which uses the average of one’s best 35 annual salaries to compute pension payouts, OTRS uses the top three years for Rule of 80 participants and the top five years for those under the Rule of 90.
There is an important fact here that Mr. Small omits, either because he is uninformed or because, wrongly, he doesn’t find it relevant. Those 35 years of Social Security wages are indexed to inflation. Something the OCPA loves to do when it fits their narrative that schools have too much money (a frank distortion) but conveniently omit if it shines a light on low teacher pay. Here’s the Social Security calculation sheet.
According to my SSA earnings record my 1974 tax year compensation was $9,965 working as a classroom teacher for Tulsa Public Schools with a Masters and going from 4 to 5 years of experience. The SSA inflation multiplier is 6.06 which results in that 1974 salary being $60,388 for calculating Social Security retirement in 2018. I note that by the just improved Oklahoma Minimum Salary Schedule a classroom teacher with a Masters at 4 and 5 years of experience will be paid $39,728 moving to $40,200. On the TPS current schedule that same teacher fares a bit better at $41,004 moving to $41,476. So, Mr. Small, bring it on!
In effect the TRS, and other defined benefit plans, final three, now five, years highest salary is a simple proxy for compensation growth and inflation that is admittedly less precise and that can favor late bloomers over steady earners as Mr. Small alleges. But he makes no serious effort to discern the actual impact because that would require real thought and research which seems beyond the capacity of the fellows at the OCPA. Instead he simply scans the data for shocking numbers to cite, spanning over 60 years of time, without any attribution to the investment earnings that largely, if not entirely, close his implied “rip-off” gap. Then he offers up Social Security’s methodology as being more fair without bothering to mention that it relies on inflation indexing that is absent from the TRS formula (and benefits!).
A personal note. He also cites my former superintendent Lloyd Snow’s pension benefit as presumably another example of this shocking rip-off he’s discovered. Lloyd Snow served the children of this state for 43 years, working every day with passion, energy and integrity. 39 of those years he served as superintendent so he was no late bloomer but was a steady performer making a difference for each school district he served. If he made a mistake he would own up to it and try to correct it. If he had employees who did shoddy work below recognized professional standards he worked to correct them. If Mr. Small would do the same in his leadership role at the OCPA maybe it would perform useful, fact-based public policy analysis instead of rearranging facts and concocting arguments to fit its pre-determined conclusions—public school administrators are paid too much and public pensions are bad.
As always lunch is on me for the first to ID the photo location.