Auditing Rodney Dangerfield's Tax Return

Stan da Man is on his way out the door and if you cruise on over to his blog and read the comments you may guess he's leaving relieved. It is amazing that the man gets such insults hurled his direction on his own blog. He don't get no respect. And there is no end to the irony of the insult hurlers claiming they get no respect, but of course that is almost always wrapped around the issue of pay. In these times it comes down to "they don't pay me enough for this," whatever "this" happens to be in the moment. Pandemic comes to mind.

But it begs the question, raised by one commentator who felt a spreadsheet might help, of "what are they paid?" Because these are government employees in a public school much of the compensation information is publicly available making modeling relatively straightforward. There remain some uncertainties in the overall compensation package, especially healthcare selection (with employer contribution) or employee selection of pre-tax (subsidized) 403b contributions. Pay and planned increases are readily available. The Teachers' Retirement System is equally well understood. There is also the Public School Employees Retirement System and contributions to a 403b can be modeled, though with less accuracy. 

So let's get started. 

Let's propose a straw-person teacher with a bachelor degree and freshly minted teaching certificate, starting out at age 25 who will then work for 40 years retiring at age 65. Ignoring likely inflation adjustments to the pay scale, this enthusiastic youngster will start at $49,400.84 and will end at $71,614.47 amassing a total pay of $2,605,146.58 over that career. Now that is total, top-line pay, not net and far from total lifetime compensation. Total lifetime compensation must include retirement plans. But how best to do that? Let's assume that this teacher retires at 65 and lives another 20 years to age 85. You gotta pick something and this is important because TRS is a defined benefit plan and is non-optional. Let's dig into that first. 

TRS is required and costs the employee 6% from their pre-tax earnings. DCSD does not match this dollar for dollar; they add 21.9% or $3.65 for every dollar from the employee. Even still... This mythical teacher will receive $57,291.58 per year until they die but we'll assume they live but 20 years limiting the total payout to $1,145,831.52, a nice return on employee contributions of $91,993.35. An alternative view is that a recent retiree went from almost $72K per year to just over $57K which seems a lot ($15K is nothing to sneeze at) until one realizes that the TRS contribution is not deducted from retirement checks reducing the hit by about $3500 leaving a $12K deficit (rounding up). That is where PSERS comes in.

PSERS costs our teacher $90 per year. Not a typo, it costs under one hundred dollars of pre-tax earnings. But what does this teacher actually get? That would be $7,440.00 per year taking a healthy bite out of the $12K deficit and more than covering the total $90 per year employee cost in the first six months.

So now our teacher/retiree is pulling down only 7% less than the best income of their working life. For the rest of their life. Which we'll limit to 20 years, but life may turn out longer and better. And more costly to the taxpayer.

Most folks outside of the government workforce and perhaps some in it would probably think this is a pretty sweet deal. Wishin' they had it so good. Still, some commenting on da Man's blog are pissed about the whole Social Security kerfuffle as if they'd like to pony up another 6.2% pre-tax. Now the teachers themselves voted themselves out of Social Security leading to the establishment of two 403b vehicles known as the Board TSA and the Optional TSA. What they're really pissed about was the expectation that county taxpayers would put 6% into the "Board TSA" (a 403b plan without employee contributions) which they did until they didn't. A court case ensued, not so much about stopping the contributions, but that it was done without proper notice. So now they have notice. But all they really wanted was the Employer's SS contribution amounts diverted to their retirement booty. But the Optional TSA allows them to sock away pre-tax earnings funding a tax-deferred investment. Since they now seem to long for the good ole days of Social Security participation what if they just put the 6.2% they'd be putting into Social Security into the Optional TSA?

Let's look at that.

At 6.2% contribution this teacher will pay in $161,519.09 and with a 4% investment yield this would result in a total investment value of $372,202.30. Holding the interest rate steady, over 20 years of retirement the retiree will pull out $26,975.75 per year, yielding a net pay in retirement well over 25% greater than the highest annual pay received while working. But they're not bitchin' about not being in Social Security and not making their contribution, they're bitchin' about not getting 6% added to their pay even though it would be put into a retirement account. That they would get at retirement. A seemingly limitless sense of entitlement causes them to expect the best of both worlds: a very generous defined benefit program AND a tax sheltered annuity funded by nothing but other people's money. 

Note: an annual percentage rate of 4% was chosen as a very conservative rate as the S&P 500 has returned a True CAGR of over 10% during the last 40 years. Also the lower rate is a reasonable, conservative "inflation adjusted" rate. A bump to 5% increases the annual payout during retirement to $37,108.81 drawing down from an account value of nearly $1M at time of retirement.