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History of the Pension Multiplier

pension multiplierWhen the conversation turns to retirement benefits, you can bet that the phrase pension multiplier will be aired shortly. To arrive at the monthly check total to be paid to a retired pensioner, a formula is used which makes use of what is called a pension multiplier. Don’t be thrown off by the esoterically mathematical sounding title – it’s actually pretty simple. Take the example of a retired firefighter who served for 25 years. Assume that his pension plan benefits are defined by a multiplier of two percent. Multiply the number of years he worked by the multiplier (25 x .02), and the result is 50%, which means this particular firefighter will retire with a pension equal to 50% of his final average salary.

As one can surmise, retirees and soon-to-be retirees get a little picky about which pension multiplier is used to calculate their monthly retirement check and will always push for the highest possible number. Back in the 1950’s and 1960’s, public service retirement plans were quite spartan, with most multipliers hovering around the one percent mark. Public salaries were low until the Baby Boomer generation hit the work force in the early 1980’s. Around this same period of time the stock market rocketed into the stratosphere and unions began gaining the upper hand in employer/employee relations.

“Pension creep” became a definable force in the workplace, with public service salaries on the increase. The dot com years of 1999 and 2000 resulted in what Alan Greenspan liked to call irrational exuberance, which bled into public pension planning. Convinced the new high-flying stock market was here to stay, legislative and pension boards tossed insanely high multipliers into the mix and called it law, even going so far as to retroactively award increased pensions to those already retired.

Of course, funding couldn’t hope to keep pace with the new pension multiplier thinking, and the inevitable crash began manifesting itself a few years ago when those same pension boards realized their business model was unsustainable once the stock market began beating portfolios into mush. Ever try to take a benefit away from someone after it has been given? That’s where we are now with public pension plans which are underfunded when compared to obligations to the tune of $2 trillion nationwide. So now pension fund managers are trying to ratchet down the pension multiplier to what they believe is a sustainable level.

Game, set, and match.

The Heroic Investing Team

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