Thursday, June 17, 2010

The Millionaire Cop Next Door

From Forbes:

It's said that government workers now make, on average, 30% more than private-sector workers. Put that fantasy aside. It far underestimates the real figures. By my calculations government workers make more than twice as much. They are America's fastest-growing group of millionaires.

Doubt it? Then ask yourself: What is the net present value of an $80,000 annual pension payout with additional full health benefits? Working backward the total NPV would depend on expected returns of a basket of safe investments--blue-chip stocks, dividends and U.S. Treasury bonds.

Investment pros such as my friend Barry Glassman of Glassman Wealth Services say 4% is a good, safe return today. But that's a pitiful yield, isn't it? It's sure to disappoint the millions of baby boomers who will soon enter retirement with nothing more than their desiccated 401(k)s--down 30% on average from 30 months ago--and a bit of Social Security.

Based on this small but unfortunately realistic 4% return, an $80,000 annual pension payout implies a rather large pot of money behind it--$2 million, to be precise. That's a lot. One might guess that a $2 million stash would be in the 95th percentile for the 77 million baby boomers who will soon face retirement.

That $2 million also happens to be the implied booty of your average California policeman who retires at age 55. Typical cities in California have a police officer's retirement plan that works as follows: 3% at age 50. As the North County Times of Carlsbad, Calif. explains: "Carlsbad offers its police and firefighters a '3-percent-at-50' retirement plan, meaning that emergency services workers who retire at age 50 can get 3% of their highest salary times the number of years they have worked for the city. City officials have said that in Carlsbad the average firefighter or police officer typically retires at age 55 and has 28 years of service. Using the 3% salary calculation, that person would receive an annual city pension of $76,440."

Who are America's fastest-growing class of millionaires? They are police officers, firefighters, teachers and federal bureaucrats, who, unless things change drastically, will be paid something near their full salaries every year--until death--after retiring in their mid-50s. That is equivalent to a retirement sum worth millions of dollars.

If you further ask how much salary it would take to live, save and build a $2 million stash over a 30-year career, the answer would be somewhere close to $75,000 more than the nominal salary, if you include all the tax bites associated with earning, saving and investing money.

In other words, if a police officer, firefighter, teacher or federal bureaucrat is making $75,000 a year he or she is effectively making twice that amount. Implied in the annual pension payout is that the individual diligently saved half of his annual salary--after taxes--in order to save, invest and build (again, after taxes) the near $2 million pot.

So when you hear that government workers now make, on average, 30% more than private-sector workers, you're not getting the full story. Government workers, on average, make more than twice as much as private-sector workers when you include the net present value of their pensions.

How long can this last?

Written by Rich Karlgaard


  1. Nope. It wont last much longer!

    And to think most gov workers like police/firefighters etc will work multiple gov jobs and retire with two pensions (by becoming city councilmen, city architects, etc).

    Some of hem even have THREE pensions.

  2. Hmmm... would be nice if that were always true for firefighters, since I'm married to one. Unfortunately that only applies to certain departments.

  3. The federal government is the next bubble to pop. The current model of government jobs growing a lot more than private jobs is unsustainable.

  4. Where are the cops that are making that much? No cop I know makes anywhere near that, nor will he after serving his time until retirement.

  5. Whoever wrote that article should check out the salaries of police officers, firefighters, and teachers in West Virginia. I know a teacher who is a single mom, and her salary is so low that her child qualifies for reduced school lunch. I could possibly be a millionaire someday, but only if I win the lottery.

  6. Anonymous above me... come on over to Los Angeles... starting pay for a cop is $70,000 dollars. YES. $70k. Not bad in a recession, huh? There are billboards everywhere here showing the starting pay and that L.A. needs more cops.

    I'm not getting down on cops and firefighters. Most of them do lifesaving work (cept the ones that hassle ministers in cars) and I dont blame them for taking advantage of the system thats in place... having multiple pensions. This is exactly the same stuff that happened in Soviet Union and the system there collapsed.

    Its simple economics. You need to have more money coming in than going out. If its reverse, somethings gonna give eventually. Unfortunately, most Americans are not taught about money & finances anymore (or were we ever??) and therefore plenty of people just mimic the government and carry too much debt. Sure, you can easily file for bankruptcy if thats your thing, but what happens when the government needs to do that? Its coming. A massive purging is going to happen soon here in America. Its best to be prepared.

  7. This article is mainly talking about the cops. The difference between cops and other government workers is that every city is ALWAYS hiring cops, whereas fire departments and schools have a surplus of people wanting to work for them, so they don't have to offer the same ridiculous incentives. The police will hire any derelict off the street.

    As for these people laying their lives on the line - please! I'm sure just as many people die in other lines of work, such as in accidents during their commute, on a construction site, etc. When your job is to pull over random strangers and extort money out of them for going 5 mph over the speed limit, even just statistically it is only a question of time until you run into a psycho who will pull a gun on you. Pick a different job if you don't want to take that chance.


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