Leading the Collapse of Public Pension Funds

Bloomberg View has an article predicting that in “the next decade, and probably within five years, some large states are going to face insolvency due to pensions, absent major changes.”

Their poster-boy state:

New Jersey  has $78 billion in its state pension fund, which is supposed to cover future payments with a present value of $280 billion. But that latter number is a projection.  You can ignore it if you wish,  or hope that soaring investment returns or a pandemic among retired workers will fix it. A more certain figure is that the $78 billion represents less than seven years of required cash payments.

If we extrapolate from the past, rather than use promises in the state budget, current employees plus the state will contribute about $25 billion over those seven years, which could provide another few years before the till is empty. But it will also add around $60 billion of future liabilities to current employees. The system probably breaks down before the pension fund gets to zero, for example if assets were to fall below $30 billion while projected future liabilities exceeded $300 billion. Even the most optimistic people would have to admit the situation is unsustainable. This could happen in three years in a bad stock market, or perhaps 10 with good stock returns. But fund assets are so low relative to payouts that good returns aren’t that helpful.

Other states get a nod but New Jersey is the bellwether:

Michigan, Pennsylvania, Florida, Ohio, Oregon, Colorado, Kentucky and Rhode Island are in similar shape. These are not the states with the biggest actuarial problems, but those likely to run out of cash first. California has almost as big a funding gap as New Jersey, but its plan is five times as big. Connecticut and Illinois are not much better funded than New Jersey, but they have longer before cash flow problems kick in.

45 responses to this post.

  1. Posted by PS Drone on April 18, 2018 at 11:39 am

    Couldn’t happen to a more deserving state. NJ was taken over by the public sector 40 years ago and it has been downhill for everyone else ever since. Remember New Jersey’s credo: Government of the public sector, by the public sector and for the public sector.

    Reply

  2. Posted by Tough Love on April 18, 2018 at 12:12 pm

    Quoting from that article …………..

    “State constitutions will be amended if necessary and big legal battles will be fought. I cannot see any plausible scenario in which full promised benefits are paid.”

    Reply

    • Posted by NJ2AZ on April 18, 2018 at 12:36 pm

      another good one:

      “Actuarial problems 25 years in the future can be solved with only moderate pain today. Cash flow problems three years in the future require chainsaws, not pens.”

      Reply

    • Posted by El gaupo on April 18, 2018 at 1:39 pm

      This is why PFRS will be seperared from the rest. We are much better funded.

      Reply

      • How is that coming along? Still on Murphy;’s desk?

        Reply

        • Posted by El gaupo on April 18, 2018 at 2:33 pm

          Yes. Word is he will definitely sign. Problem is making sure that the state does not incur penalties for divesting from certain hedge funds when the money is seperated. That issue is being worked on…or at least that is what I’ve been told. It has been on his desk for weeks now. I believe he has 45 days to sign or veto. If he does nothing it becomes law.
          Former gov lied to us, so…..who knows what’ll happen.

          Reply

      • Posted by Brian on April 18, 2018 at 3:16 pm

        PFRS may be in better condition than PERS or TPAF, but it is still far short of being in good shape. Looking at the 2017 CAFR for New Jersey, PFRS is projected to see its assets completely depleted in 40 years – and that is if they earn a level 7% every year and the other results match expectations. I’m curious about what sort of future contributions they assumed, but I can’t find the actuarial valuation for the fund. Given the state’s history regarding actual contributions versus ‘promised’ contributions, there is a good chance the projection of 40 years until asset depletion is relying on an assumption about contributions that is aggressive.

        It most likely won’t be the first fund to bottom out, but the indications are not good for continued sustainability.

        Reply

        • Posted by Tough Love on April 18, 2018 at 3:31 pm

          Regardless of what Local PRFS Officials say, the Local PFRS “official” funding ratio in the high 60s% drops into the mid 40s% if valued using the SAME valuation assumptions & methodology commonly used in Private Sector Plan valuations, a funding ratio SO LOW/POOR, that if it WERE a Private Sector Plan, it would RIGHT NOW be barred from granting any future service accruals.

          One bad stock market crash and it’s all over.

          Reply

          • Posted by El gaupo on April 18, 2018 at 5:37 pm

            Oh cmon. That’s like Saying if we get one big bull market we are on easy street. TL, if your near my age, you and I will be in wheelchairs when the day of reckoning comes for Pfrs.

          • Posted by El gaupo on April 18, 2018 at 5:44 pm

            Didn’t we see about $1.2 B go into Pfrs this year and $1.9 paid out? With over $21B in assists the fund had to make a little less than 5% to match the $1.9B.
            I think you will first see the pers plan cease for new members. Maybe by 2025. Teachers will be a few years later because they will resist it. May even see a watered down(tier6?) benifit for new teachers.
            I don’t see any changes coming to Pfrs in the next decade except cola coming back in exchange for a giveback (min age to collect).

          • Posted by Brian on April 18, 2018 at 6:43 pm

            El guapo -“I don’t see any changes coming to Pfrs in the next decade except cola coming back in exchange for a giveback (min age to collect)”

            Perhaps so, the fund would be unlikely to run out of assets in that short time period. However, that would make it very likely for the fund to be drained in the 25-40 year horizon. The plan trustees are supposed to be fiduciaries for the entire membership, including new hires. Approving that sort of approach would be gambling the younger participants money; if that gamble pays off, the retirees make out well with a COLA, and the younger participants perhaps get their money back. If that gamble doesn’t pay off, the retirees make out well with a COLA for a little while, then it probably gets taken away; meanwhile, the younger participants lose most of what they put in, maybe all.

            The appeal of that wager, from a participants point of view, may depend on where he/she is in his/her career path. But from a fiduciary’s perspective, it is difficult to justify.

          • Posted by Tough Love on April 18, 2018 at 6:59 pm

            El gaupo,

            You’ve HAD you “bull” market for the past 8 years …….. one of the longest on record. Few knowledgeable in finance don’t see a significant correction on the horizon.

          • So you’re between the devil and the deep blue sea. Can’t afford to pay the pensions, can’t afford not to.
            ——————-
            When a GED just won’t cut it…

            How much is a policeman worth? If you have to ask, you probably can’t afford it.

            http://www.governing.com/topics/public-justice-safety/gov-hiring-police-officers.html

    • Posted by Anonymous on April 18, 2018 at 4:13 pm

      ..and in the meantime, the lawyers will suck out every last penny that they can on both sides……arguing the constitutional changes, laws and worthless promises

      Reply

    • Posted by El gaupo on April 19, 2018 at 9:31 am

      About the above article concerning lack of interest in police work and the need to ENHANCE benifits….who’d a thunk it?!?!?
      You mean these cops would dare leave he force if they aren’t making decent money!?!? Or future cops would change their mind?!
      Cmon guys. This article hits the nail on the head. Many large cities across several states this is happening. From the right we hear “we need to cut your benifits and limit your raises”.
      From the left we hear “you are brutal, rascist pigs, and I am recording you so if you so much as look at me he wrong way I’ll post this on you tube and embarrass your family to boot”
      Oh my God, Please make the job worth doing so we don’t have to lower standards!!!! Please don’t lower education requirements or allow folks with criminal records (not talking for littering or small stuff) to join the ranks!!! Not a solution. Better pay is!!! You’re always going to have the bullshit from the far left, I can deal with that. But if you are not meeting your recruitment goals you need to raise compensation NOT lower standards.
      Get rid of the cap on annual raises here. It will bite you in the ass in the long run.
      It is happening in other states with teachers and now cops!!!! It is happening here with judges and school supers. For gods sakes please don’t lower standards. We need good men and women in police work. Not folks who can’t meet the standards. That article is an eye opener.

      Reply

      • Posted by Tough Love on April 19, 2018 at 11:21 am

        Do you really think that of the 100, 300, even 500 people applying for each bedroom community Police opening there aren’t AT LEAST 10% who would make fine officers?

        I do, and I believe that PHONY whittling down to the ONLY 2 or 3 “acceptable” candidates (1 or 2 of who, somehow always seem to know have the right “connections” with town leaders) is done SPECIFICALLY to make it APPEAR that there is a shortage of qualified candidate simply to keep the compensation (especially the pension & benefits) at the ludicrously excessive level it is today.

        Reply

        • Posted by El gaupo on April 19, 2018 at 12:59 pm

          1) the bedroom communities pay more. It will happen in he cities first. It will obviously spread as years go by. However, suburbs can raise salaries if need be. Years away in suburbs I agree. But there is a town in Bergen county that made things so bad for new hires that there last 5 hires have transferred. Small town 20 guys.
          2). Once again. Wrong. Lol. Stick to what it is you do. I agree that there is too much of the friends and families getting hired. In ALL aspects of govt. Boro attorney, pd, Dpw, Boro hall secretary, fire inspector etc. on and on. However, usually a pd will present a short list to a council to hire w their recommendations. Our town accepts resumes. We prefer alternate route candidates (paid for and completed police academy prior to the interview) because it is cheaper for the town and usually a candidate is Serious about he job if they do that. But the real reason is that it costs thousands to hire a guy, Between background checks, psychological test, Medical clearance, etc. to do that for 50 people for 1 spot would be ridiculous. Usually top 3-5. Based on resume, interview, second interview. Physical test isn’t needed because they passed he academy already but psych and med test are.

          Reply

          • Posted by El gaupo on April 19, 2018 at 1:14 pm

            Usually council will want to sit in on second interview or conduct a brief interview of their own. I was an alternate route hire back when I started. I barely had even heard of the town hat hired me. Back then there was a written test that 200 folks took. Now the town accepts resumes. Keeps them in a folder, reviews them when we are hiring and calls about 20 or so in for interviews.
            You sometimes can be a negative person and always assume that folks that work in government don’t give a shit about their work. Most do. Because it is the public sector every mistake or cost to the public is under a bright spotlight. We know you work in finance. That is all you want to share. Which is fine. Just saying, I’m sure that their are folks in you line of work who may not have deserved to be. Perhaps a more qualified candidate etc. friend of the boss. Whatever. The spotlight is not on those folks.
            Don’t forget it that mayor and councils job not only to keep costs down but hire the most qualified person for the job.
            When we collectively bargain for raises, the towns aim is more nuanced. The pba (as any employee) wants the best deal it can get. It’s main and only interest is securing the best compensation package it can. As in ANY employee negotiation. From the town side the goal is NOT to get the cheapest deal they can but to get the most efficient deal they can. Pay the lowest they can to keep/hire qualified people. As it is any employers job to hire he best qualified person for the lowest price. Not just the lowest price. That does one no good when shit starts to unravel.

          • Posted by Tough Love on April 19, 2018 at 1:24 pm

            Quoting ………………..

            ” But the real reason is that it costs thousands to hire a guy, Between background checks, psychological test, Medical clearance, etc. to do that for 50 people for 1 spot would be ridiculous. Usually top 3-5.”

            Looks like you CONFIRMED what I was saying, that the supposed scarcity of qualified candidates (put forth as justification for the ludicrous compensation) isn’t real, and that you’re just picking the best 3 to5 (of a likely much LARGER group of qualified candidates) because of the cost of vetting.

            Not saying that that’s wrong, but saying that ONLY 3 to 5 meet the qualifications, is surely BS.

  3. Posted by Cook County Commoner on April 19, 2018 at 2:57 pm

    Just wondering if state default projections should be shortened by likely local municipal gov pension defaults preceding them. Here in Illinois, we have lots of local fire and police pension plans in trouble. Harvey, IL is a poster child for corruption and mismanagement, and it is on the verge of fiscal collapse. Due to state law, it cannot declare bankruptcy without state approval, and the state will fight that fearing a run by other insolvent communities. I see state resources being diverted to local communities further jeopardizing state finances in order to hide the problem from the clueless majority of voters.

    Reply

    • Posted by Tough Love on April 19, 2018 at 3:13 pm

      In NJ it’s the STATE-sponsored Plans (especially the Teachers) are are in much worst shape than the Localities.

      Reply

      • Posted by El gaupo on April 19, 2018 at 7:49 pm

        Thank you for admitting as such. One of two reasons that the pfrs members want to seperate.

        Reply

      • And why are the state plans worse? Because locals are _required_ (by state law), to pay the full ARC.

        Ironic?

        Reply

        • Posted by El gaupo on April 20, 2018 at 2:05 am

          Yes. The state passed a law requiring them to pay the ARC to. Christie’s Supreme Court said he didn’t have to pay it.

          Reply

        • Posted by Tough Love on April 20, 2018 at 11:58 am

          Yes, Local Taxpayers are FORCED to fully fund Local PFRS pensions that are ROUTINELY 3.5 to 4 TIMES greater in value upon retirement than those of the town’s Private Sector Taxpayers who retire at the SAME age, with the SAME wages, and the SAME years of service ….. and with Police “wages” alone exceeding those of most comparably educated, experienced, skilled, and knowledgeable Private Sector taxpayers, there is ZERO justification for ANY greater pensions or benefits.

          Yes, we’re being FORCED to pay for something that was NEVER necessary, just, fair to taxpayers, or affordable.

          Reply

        • Posted by Stephen Douglas on April 20, 2018 at 2:46 pm

          It is invalid (still) to compare pensions outside the context of total compensation.

          If only about five percent of private sector workers (and declining) still have DB pensions, at what point is it no longer a logical comparison? (Correction; at what point _was_ it no longer logical?)

          https://m.wikihow.com/Calculate-Outliers

          It is difficult to compare total compensation of public sector workers to private sector workers with DC plans (or to private workers with _no_ plan). It is invalid to compare _only_ the pensions in either case.

          Total compensation is the only valid comparison, and even that is extremely subjective.

          SHAME, SHAME, SHAME

          Reply

          • Posted by Tough Love on April 20, 2018 at 5:09 pm

            Quoting……….

            (1) “It is invalid (still) to compare pensions outside the context of total compensation.”

            I didn’t, because I pointed out that their WAGES alone are greater ……. but I’m sure you saw that but needed to throw some more of your BS into the discussion.

            (2) “If only about five percent of private sector workers (and declining) still have DB pensions, at what point is it no longer a logical comparison?”

            Wrong AGAIN, because we BOTH know that the 401K Plans that have mostly replaced DB Plan in the Private Sector are even LESS generous than the Plans they replaced ….. and I’m CERTAIN you knew THAT as well, but needed to throw some more of your BS into the discussion.

          • The name of the game is…

            Total compensation.

            Even in the private sector, if you have two similar companies of similar size, one with a DB pension and one with no pension or 401(k), standard economic theory suggests that the company with no pension available would have higher wages. The company with lower wages uses the pension to help attract and retain employees. Companies rarely offer pensions for purely altruistic reasons.

            For any random two companies, this is not necessarily true, but for the average of all similar companies, total compensation is likely to be very similar between companies with or without a pension plan. Is it unfair to say that the company with a pension plan has a larger pension than one without? Total compensation is the key. An applicant can then choose to work for higher wages with no pension, or for lower wages, with a guaranteed pension (deferred compensation).
            —————————————-
            Quoting Mr. Love…

            “I didn’t, because I pointed out that their WAGES alone are greater …….”

            You pointed out your _opinion_ that wages are greater.

            Economic experts have great difficulty comparing the compensation of public/private employees, and the comparison of safety employees to all others is even more subjective. Bring us the _data_ on those “comparably educated, experienced, skilled, and knowledgeable Private Sector taxpayers”

            Bergen County police are not typical, and opinions are not data.

            Share your wisdom with those governments which are now _increasing_ wages and benefits to compete with other governments or the private sector to attract/retain police.

            “One driving factor is the stronger economy. Rapich says about half of his departing state police officers moved to the private sector or chose to pursue other opportunities outside of law enforcement, such as going back to school.”

            http://www.governing.com/topics/public-justice-safety/gov-hiring-police-officers.html

          • Posted by Tough Love on April 20, 2018 at 8:55 pm

            Stephen Douglas,

            Total Compensation is = pensions + benefits + wages.

            You have on numerous occasion agreed that Public Sector Pensions & Benefits are greater than those of comparable Private Sector workers*, so in order for Police Officer Total Compensation to not exceed that of Comparably educated, experience, skilled, and knowledgeable Private Sector workers, there would need to (a) be a Private Sector wage advantage, and (b) that wage advantage would need to be greater than the Police Officer pensions & benefit advantage.

            (b) need not be addressed, because (a) is false by a long shot, and anyone who believes otherwise is ……. Uneducated/uninformed, a Charlatan, a BS artist, or a Liar?

            * and true to an even greater extent for Police, who have MUCH richer than average pension & benefits.

          • Posted by Stephen Douglas on April 20, 2018 at 11:04 pm

            “(a) is false by a long shot,”

            So says Mr. Love, again.

            Josh Rauh and others can’t find a suitable benchmark, where is yours?

            Data, dude. You can’t just make this stuff up.

            “anyone who believes otherwise is ……. ” is still not data. CAPS LOCK is not data. Constant repetition is not data.

            Talk to the Board of Supervisors. If they could hire a cop for the same salary as a roofer, I’m sure they would.

          • Posted by Tough Love on April 20, 2018 at 11:35 pm

            Well, I don’t think there is ANY question the Police pension & benefits are MUCH more generous than what comparable Private Sector workers get so let’s just lo at wages.

            I live in the NJ, and all I need to do is LOOK at what my (and all the surrounding towns) are granting Police Officers in WAGES. I don’t know about YOUR (CA) town, be where I live there is no doubt the Police WAGES far exceed those of comparably experienced, educated, skilled and knowledgeable Private Sector workers.

          • Posted by Stephen Douglas on April 21, 2018 at 12:22 am

            Quoting…

            “Well, I don’t think…”

            And therein lies the problem.

            “all I need to do is LOOK at what my (and all the surrounding towns) are granting Police Officers in WAGES.”

            No, Mr. Love.

            First, again, the wages in your neighborhood are among the highest in the country.

            Second, it’s an easy claim to make on this, or any other blog, but the reductions you are proposing are life altering. Imagine if you could sue your local government to reduce police pay and/or pension reductions. “where I live there is no doubt the Police WAGES far exceed those of comparably experienced, educated, skilled and knowledgeable Private Sector workers.” will absolutely not be sufficient. You need evidence. You need data. You can not dream up a hypothetical private sector worker with the same experience and responsibility, and _assume_ he has equal or lower pay.

            But keep on trying.

          • Posted by Tough Love on April 21, 2018 at 3:10 am

            Quoting Stephen Douglas ………..

            “First, again, the wages in your neighborhood are among the highest in the country.”

            Really (it’s middle-middle class) and as you would say, where the “data/evidence” to back that up ?

            And the pension/benefit “reductions that I am proposing” only eliminate the EXCESS that was never necessary, just, fair to Taxpayers, or affordable …….. and granted only as a result of the rampant COLLUSION between the Public Sector Unions and our self-interested, contribution-soliciting, vote-selling Elected Officials.

            EQUAL, but not better……… on the Taxpayers’ Dime !

  4. They are talking states. Don’t forget the cities. I’d bet that the California plans and the New York State plans, which also cover local government workers in the rest of the state, are the only ones bigger than NYC.

    No one wants to talk about NYC, because it’s the place where taxpayers put in the most and still ended up in a hole as deep as NJ due to pension increases.

    Reply

    • Posted by Brian on April 20, 2018 at 8:18 am

      Watson Towers Willis publishes a list of the biggest public funds. It’s ranked by assets rather than liabilities, but it does give a good sense of scale for most, and you’re right.
      CALPERS $307B
      CALSTRS $194B
      NY State Common $184B
      NYC Retirement $172B
      Florida State Board $154B
      Texas Teachers $133B
      Wisconsin Investment Board $101B
      North Carolina $99B
      Washington State Board $92B

      And then Ohio Public Employees, California Universities, New Jersey, Virginia, and Oregon Public Employees as the next five.

      For some of these (New Jersey, NYC, Wisconsin) the assets of several different pensions are aggregated and managed by the same entity. I am not sure how these arrangements would be handled in truly dire, point-of-no-return (bankruptcy-like, or cash-flow constrained) circumstances, with the pension systems (e.g, in NYC, Public Employees, Police, Fire, Teachers, Board of Ed.) each handled individually, or if they’d all be subject to the same remedies.

      Ranked by liabilities instead of assets, Illinois Teachers is probably in the top ten. By assets, it is not even close.

      If you’re interested in the NYC plans, the Tax-Deferred Annuity portion of the Teacher plan should get some real scrutiny. More than $25B of DC money invested in the DB fund and given a guaranteed return of 7%. One of these years the DB plan is going to experience poor returns. Say they get -5%. That would mean they would have a loss of $1.25 Billion on that TDA money, but they’d still go ahead and credit +$1.75 Billion to those TDA accounts (at 7% interest – I believe some of the accounts have a higher crediting rate). That would be a $3 Billion loss to the DB plan.

      Reply

      • Posted by Tough Love on April 20, 2018 at 12:08 pm

        WOW, a TDA with a GUARANTEED return of 7% in THIS (extremely low interest) environment.

        It astonishes me that such “promises” are legal……….. clearly a THEFT of Private Sector Taxpayer wealth.

        Reply

  5. Posted by Anonymous on April 21, 2018 at 6:55 am

    …..I think I have asked this before but if cops and fireman are not paying into social security that means they have a whole lot more in their paychecks in addition to the generous salaries not counting all of the benefits

    Why are they NOT required to pay into Social Security and shouldn’t that extra money in their pay checks be used to invest in their OWN retirements

    Just asking…….

    Reply

    • Posted by El gaupo on April 21, 2018 at 9:27 pm

      Ronald Reagan. As in the Windfall elimination provision. Signed in the 80s. Basically, states that if you receive a govt pension, you will ha e your social security cut by a percentage based on the amount of years you work. I believe it is a 40% reduction for 20 years. And maxes out at 90% at 30 years plus. In other words , I pay full price in but don’t get what private sector folks w a pension are entitled too. Therefore, lots of pd and fd do not participate However, if I work outside the pd (I have for about half my career) I pay full price in and still get the reduced amount. Not really fair but….it is what it is. That is precisely why our pensions are higher than teachers,Dpw, etc. they all get SS as well and get the reduction. I would be fine with it if I had to pay in to SS. I pay 10% of my salary into my pension and no 457 match is offered. Again, fine due to the pension. I try to max out most years if I can as well as investing into a Roth for myself and my wife.

      Reply

      • Posted by El gaupo on April 21, 2018 at 9:29 pm

        Those percentages are confusing. It is a 40% reduction at 20 years and a 10% reduction at 30. 90% of the benifit is paid with 120 quarters of service.

        Reply

        • Posted by Tough Love on April 21, 2018 at 10:29 pm

          El gaupo,

          The reduction you describe ONLY applies if you did NOT contribute to SS while working in the Public Sector job.

          Additionally, it’s called the “Windfall Elimination Provision … WEP for short” by the SS administration (not some right-wing group out to hurt Public Sector workers) because it’s purpose is to “ELIMINATE” an otherwise unjust windfall. If you carefully read HOW it is applied and WHY it works that way, it’s not difficult to understand.

          So no, THIS statement of yours ……

          ” In other words , I pay full price in but don’t get what private sector folks w a pension are entitled too. ”

          is complete BS.

          And quoting…………

          “I work outside the pd (I have for about half my career) I pay full price in and still get the reduced amount. Not really fair but…”

          The first sentence in that quote is correct. BUT is IS “fair” and appropriate to REDUCE the other-wise calculated benefit (as SS does via the WEP) to ELIMINATE an unjust “windfall”. As I stated above … READ the WEP provisions the SS website (with an open mind) and it’s easy to understand.

          Reply

          • Posted by El gaupo on April 23, 2018 at 6:48 am

            Why? If I pay the full amount in(which I am
            Admitting I don’t pay into…no choice in the matter) because I have 40 quarters, why should I not get the SAME amount that someone with a similiar salary and private sector pension get. Got a problem with equal?!??
            Most cops and ff nationwide don’t pay in. But others like Dpw do. Why should someone who gets a $45000 Dpw pers pension have their SS reduced but a ironworker, electrician, plumber etc in a private sector union collect the SAME $45000 pension be entitled to a higher SS check even though each employee paid a similiar amount into the system?????
            Why, if I work 30 years in social security by working a second job/first job before and after police work, while some work no job and get benifits) and putting a similiar amount of money into the system, should my benifit be cut? What difference does it make whether the food I buy as a 70 yr old was paid with a govt pension or a private sector pension?? None. The benifit should be same. I don’t have a problem with EQUAL. I don’t know why you do.

          • Posted by Tough Love on April 23, 2018 at 3:20 pm

            El gaupo,

            I’m not sure if you don’t understand The legitimate purpose of the WEP or do but are simply being stubborn. The following is directly from the SS website re the WEP:
            ———————————————
            How It Works

            Social Security benefits are intended to replace only
            some of a worker’s pre-retirement earnings.

            We base your Social Security benefit on your average
            monthly earnings adjusted for average wage growth.
            We separate your average earnings into three amounts
            and multiply the amounts using three factors to
            compute your full Primary Insurance Amount (PIA).
            For example, for a worker who turns 62 in 2018, the
            first $895 of average monthly earnings is multiplied by
            90 percent; earnings between $895 and $5,397 by 32
            percent; and the balance by 15 percent. The sum of the
            three amounts equals the PIA which is then decreased
            or increased depending on whether the worker starts
            benefits before or after full retirement age (FRA). This
            formula produces the monthly payment amount.

            When we apply this formula, the percentage of career
            average earnings paid to lower-paid workers is greater
            than higher-paid workers. For example, workers age
            62 in 2018, with average earnings of $3,000 per
            month could receive a benefit at FRA of $1,479 (49
            percent) of their pre-retirement earnings increased by
            applicable cost of living adjustments (COLAs). For a
            worker with average earnings of $8,000 per month, the
            benefit starting at FRA could be $2,636 (32 percent)
            plus COLAs. However, if either of these workers start
            benefits earlier, we’ll reduce their monthly benefit.

            Why we use a different formula

            Before 1983, people whose primary job wasn’t
            covered by Social Security had their Social Security
            benefits calculated as if they were long-term, low-wage
            workers. They had the advantage of receiving a Social
            Security benefit representing a higher percentage of
            their earnings, plus a pension from a job for which
            they didn’t pay Social Security taxes. Congress
            passed the Windfall Elimination Provision to remove
            that advantage.

            Under the provision, we reduce the 90 percent factor
            in our formula and phase it in for workers who reached
            age 62 or became disabled between 1986 and 1989.
            For people who reach 62 or became disabled in 1990
            or later, we reduce the 90 percent factor to as little as
            40 percent.
            ——————————————
            In words, just like Federal Tax “rate” INCREASES as your taxable income increases, Social Security benefits DECREASES as you wage-indexed career average earnings increase. It’s a social-needs-based design element intended to give LOWER paid workers a GREATER percentage of their earnings (the replacement ratio).

            Lets look at a (simplified) example using the amounts and replacement ratios from the SS description above……….

            Lets assume both of those workers worked for the full 35 year period (that SS uses in it benefit calculations), with both retiring at their FULL RETIREMENT AGE of 66 in 2018:

            Assume person “A” has average wage-indexed monthly earning of $3,000. Their SS benefit would be (895×90%) + [(3000-895)x32%)] = $1,479.10, giving a replacement ratio of $1,479.10/$3,000=49.3% (as shown in the SS description above).

            Assume person “B” has average wage-indexed monthly earning of $8,000. Their SS benefit would be (895×90%) + [(5397-895)x32%)] + [(8000-5397)x15%)] = $2,636.59, giving a replacement ratio of $2,636.59/$8,000=32.96% (as shown in the SS description above). Note that this higher-income worker “B” is getting a LOWER replacement ratio that worker “A”.

            An examination of theses calculation CLEARLY shows the INTENT of the SS calc to provide a LOWER replacement ratio as the average wage-indexed monthly earnings increase.

            Now let’s do a similar calculation for person “C” who (while holding a well-paying Police Officer job such as yours that does NOT participate in SS) also worked for 10 years in a SS-participating Private Sector job with wage-indexed average earning of $8,000 (the same as that of person “B”) but JUST OVER THE 10 YEAR period. The way the SS calc. works is to add $0 earning for each year (up to the 35 year maximum) for which no earnings are reported. Therefore in the actual SS calc, average earnings would be (10×8000) + (((35-10)x0) = $2,285.71. Their SS benefit would be (895×90%) + [(2285.71-895)x32%)] = $1,250.53, giving a replacement ratio of $1,250.53/$2,28571=54.71%.

            SS recognized that this situation is NOT “fair” in that it is giving person “C” a benefit with a replacement ratio of 54.71%, a high replacement ratio normally reserved for LOW income workers SIMPLY BECAUSE the short career (10 years in this example) of high income is being treated the SAME as a long career (35 years in this example) with low income. The WEP was put in place to “eliminate” that “windfall” by recognizing that person “C” was indeed really a high-income worker, and as such the replacement ratio should be the same (or close to) that of a HIGH income worker.

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