Wisconsin Teachers and Pensions: A Question of Fairness

In Wisconsin, a brewing battle between the state public workers union and the Republican-controlled Statehouse and Legislature erupted into open warfare when Democratic lawmakers literally fled the state to derail the legislative process and prevent a vote on modest reforms to teacher's pensions.

Wisconsin, like many states, faces tough budget challenges. The current decifit is $3.4 billion, and, unlike its neighbor Illinois or big brother the Federal Government, Wisconsin is trying to do the right thing and get out ahead of the problem.

Gov. Walker, who swept into office by soundly beating his incumbent opponent, and the State Legislature -- which saw absolute shallackings for the Democrats, who lost control of both houses -- are beginning a series of reforms to get the budeget under control. One of their first targets is reforming public workers pensions. His proposals would save the state about $300 million per year.

The teachers' union, of course, cried foul and has staged large protests and the equivalent of boycotts. They argue it is a question of fairness.

I agree: this is 100% a question of fairness.

Wisconsin pension law determines the overall amount of money that must be set aside for pension contributions. Currently, the law mandates a cost of 5% of a teacher's salary plus 6.6% in employer contributions. That seems to make sense.

But here's the rub: that law only proscribes the cost required. In practice, teachers pay absolutely nothing to their pensions. The entire cost is borne by the school system, aka the taxpayer.

Gov. Walker submitted a relatively modest proposal that, heaven forbid, teachers should contribute something to their own defined benefit plan. He suggests the 5% that is allocated to the employee but is actually now paid for by the employer. In exchange, he promises no layoffs or furloughs.

For your average teacher, who makes $48,000 per year in salary (and about twice that in total compensation), this amounts to about $100 out of every paycheck. But, I'm always curious as to whether or not something like this a good long-term deal or if, in fact, the teachers are getting treated unfairly on this one.

I used the Wisconsin Pension System's online calculator to figure out what my monthly pension would be if I worked in the system for the minimum 25 years, retired at age 65, and my highest three years of salary were around $75,000 (which are fair estimates, according to other data). My total pension: $2,500. (Keep in mind I also get Social Security on top of this, for total retirement income of about $4,000.)

Using our handy calculator from ImmediateAnnuity.com, we find that this annuity has a cash value of about $400,000.

So what is the rate of return if I contribute $200 per month, for 25 years, and end up with $400,000?

12.75%

Seeing as how that rate of return is almost double what the average person with a 401(k) can expect to get in the market, this is a pretty great deal. The state -- aka, the taxpayers -- are still picking up 57% of the pension cost. And the teacher's union has filled the streets, howling protest that they might have to accept this horribly burdensome arrangement.

Meanwhile, an average person without a defined benefit package (e.g. most of us), would have to save about $500 per month -- or, if we made the same $48,000 salary, the equivalent of 12.5% of our paycheck -- to end up with the same $400,000 to purchase a comparable annuity.

This debate about pensions is, most definitely, a question of fairness.