Friday, October 28, 2011

California Pension Reform

I have always had a fascination with California politics and we've talked a lot about personal finance. So I read this reform proposed by Jerry Brown with interest:

To deal with what have been widely seen as abuses of the retirement system, Mr. Brown said the pensions of all new employees should be based solely on their regular salaries, not taking into account any overtime or bonuses. For existing employees, he said the retirement benefits should be based on an average of the last three years’ salary.

I was always surprised that it was any other way. After all, employee base salary is a reasonably predictable variable for actuaries. Furthermore, base salary is likely to be more representative of the income that actually needs to be replaced in retirement and inflating that number can lead to very high liabilities. Finally, it creates the potential for unfairness as the ability to get overtime in one's final three years may depend on the discretion of the supervisor.

I am completely against the current assault on pensions but that doesn't mean that we shouldn't look for places where intelligent reforms can happen.

All in all, it seems like a much saner approach. We'll see if it manages to gain any traction!

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