Saturday, February 5, 2011

Progressive Logic & Compound Interest II

There have been many calls from progressives for the government to slash military retiree benefits and an independent commission's call for an integrated active and reserve retirement system would put an end to immediate retired pay for active duty members after 20 years.

Under the proposal, retired pay would begin at age 62 for those with 10 years of service, age 60 for those with 20 years, and age 57 for those with 30 years. "There are people who see military retirement, with its immediate annuity as very generous at a time when pensions are disappearing in the private sector" said a house aide, who asked not to be identified.  (Army Times)

Let us take for an example an E-8 with 25 years of service from 1985-2010

In his last three years of service he earns $4499 (as an E-7), $4786, and $4948 in base pay. His high 3 average (which they use to calculate retirement) is $4744 and of that sum he takes home in retired pay 62.5% or $2965 a month, $35,889 a year. Sure seems like a lot, if he lives to the age of 75 the government will have paid him $1,076,400 over 30 years.

Suppose instead this upstanding young soldier had put $100 a month with 200% matching contributions (that's what my company does) for his first 10 years, $150/mo for his next 10 years, and $200/mo for his last five years. The average annual return from the S&P 500 from 1985-2010 was 12.43%. At the end of ten years, with $3600 a year invested, he has $65,000, increasing the contribution to $5400 at the end of twenty years he has $309065, and saving $7200 for the last five he ends with $601,348.

If he moves his portfolio into a more conservative investment earning 6% and is allowed to withdraw the equivalent of his retirement pay at age 45 ($35880/yr) he will still continue earning money on the principal. Withdrawing $35880 a year, he has over the course of time: 5-yr $590,342, 10-yr $575,612, 20-yr $529,525, and at the end of his life at 75 he leaves $446,974 to his heirs. Now if the government had done the same thing with the money it needed to pay for his retirement benefit, almost half a million dollars would go back in the fund. Some will die at 65 some will die at 90, it is these variations that allow the fund to cover everyone.

Effectively the military retirement system is the equivalent of a 401K without the employee contribution and without the age penalty restrictions. With military, federal, state, and other institutional pensions the same general equivalency can be made, the difference between a public and private pension is the government is the fund manager as opposed to a private company. What's sad is that for many years employees with the option to participate in government or private pension options chose the government because they trusted them more, today we see how far that trust was misplaced.

Bernie Madoff is Jealous

The federal, state, and local governments engaged in pension fund management practices that had they been civilian would have landed them in the cell next to Bernie Madoff, and today the progressives blame the retirees for being greedy. Little blame falls on the idolized political candymen who handed out unfunded or underfunded social programs like kibble. Politicians gambled and lost, now it is time to pay the piper and they are more than happy to throw their constituencies to the wolves.

Ask yourself...who's to blame? The retired Army Major, statehouse Secretary, Fireman, Schoolteacher? Or the politicians who played tricks with funding and money that would land them in jail if they worked for IBM? Our politicians pay off one credit card with another, and the Repo-man is catching up.


Divine Theatre said...

Not just greedy...a greedy racist who hates kittens.

Fredd said...


The blame equation:

90% blame on the politicians of the past who mortgaged their future constituent's cash flows in order to gain immediate short term power. Yeah, they should be incarcerated, except that most of them are already dead now. A pox on their memories.

We still, however, have living breathing politicians that are doing the very same damn thing; promising the wealth of future generations to current constituents, which should be a crime punishable by incarceration.

10% blame has to go to the receiving constituents, who with any reasonable foresight would see that they are believing pie in the sky promises that are bound to implode at an unknown point in the future.

Silverfiddle said...

I would go harsher on We The People, Fredd. There may be an ignorant small percentage who really think Uncle Obama has his own stash of money he spreads around, but the vast majority of us know money doesn't grow on trees in our own back yards and it sure as hell doesn't in government orchards either.

Finntann said...

Honestly SF, I don't think the percentage is all that small.

The equivalent of politicians treatment of state retirement programs is saying "sure I got a retirement plan, I buy a lottery ticket every Friday".

It galls me that people who attempt to collect what was promised to them are labeled 'greedy'.

Fredd said...


What would you call someone who believes that he/she can work for the government until the age of 52 and collect 75% of their salaries in the form of an unlimited pension from that same government for the rest of their lives?

I would call them a fool, if they think that this bargain is in anyway sustainable by any municipality in the long run. Greedy, no. Gullible, yes. And risky as well. What happens when eventually the municipal government, whose long ago leaders promised them their pensions, goes broke?

They won't have a leg to stand on. When the money is gone, the money is gone.

Lisa said...

This why England is slashing back because they finally realized they are running out of other people's money.

Jersey McJones said...

None of this would even be an issue if we hadn't maintained a massive standing military for the past 70 years and running.

Armies are expensive. Many a great power has collapsed under the weight of military debt over the course of history. We most all, myself included, feel obligated to those who take arms for our nation. On the other hand, why the heck were we asking them to take arms in the first place? On the other-other hand (we're supposed to have three hands, apparently), whether we needed it or not, these people took up arms for us, so what are we to do?

Well, we should honor our obligations, first and foremost. People who don't honor their obligations are scum. I know I don't want to be scum, if I can avoid it. But we should also realize the error of our ways and don't enter into such unteneble obligations in the future.

So, let's not be scum, let's honor our obligations, but let us also stop entering into such obligations in the future.

We don;t need a massive military. It's &^%$#@! stupid.


Finntann said...

Fredd: I wouldn't call them anything, I would call the person who made the offer a fool. However, once offered and accepted it is a binding contract. What you fail to acknowledge is that it is part of their compensation package, no more morally or ethically rescindable than your former employer asking for you to pay back 20% of the salary they paid you over the years because they paid you too much.

Jersey: I agree, we need to honor our obligations. However, the point of the article is that the offer wasn't untenable. For little money (a few hundred a month) properly invested over the course of the career, the government would have had plenty of funding to cover the obligation. But the government, state or federal, didn't invest, they gambled and they lost, that doesn't negate the debt owed.


Jersey McJones said...

Finntann, what do you mean by "properly invested?"

On one hand you talk about the error of "gambling" and on the other you are suggesting we should have gambled?

There are not sure bets. When we as a people make commitments, we have to back them up. We can't just gamble the money in the markets. We have to work, and pay our taxes, and be responsible for our obligations.


MK said...

"Little blame falls on the idolized political candymen who handed out unfunded or underfunded social programs like kibble."

Exactly, it never does. They waltz in making grand promises about this and that, by the time the dust has settled and we figure out what's really happened, they're long gone on fat pensions and perks for themselves.

"Our politicians pay off one credit card with another, and the Repo-man is catching up."

...catching up to us.

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