January 27
Life, liberty and the pursuit of a good pension

As a globally-minded office, we at PSTS were particularly interested by an event occurring in the US on 20 January 2017. This event, of course, was Barack Obama becoming eligible for his pension.

Pensions (and other benefits) for former US presidents were introduced by the Former Presidents Act in 1958. Under this Act, former US presidents are entitled to a pension equal to the salary of public employees of “Executive Level 1” status, which for the calendar year 2016 was $205,700.

Compared to most defined benefit pension schemes, this arrangement is extremely generous. Former President Obama accrued 8 years’ service and since 2001, the annual salary of the US president has been $400,000. This equates to an accrual rate of around 1/15, meaning that former President Obama effectively accrued a pension equal to 1/15th of his salary for each year in service. By contrast the most common accrual rate in the UK is 1/60, meaning that employees accrue a pension equal to only 1/60th of their salary for each year in service.

Another anomaly in comparison to most defined benefit pension schemes is that there is no retirement age set under the Former Presidents Act; former presidents start receiving the pension immediately after leaving office whatever their age. As the fifth-youngest person to become a US president, being 47 at the time of his inauguration in 2009, this pension is extremely valuable to former President Obama due to the length of time it is expected to be paid.

Assuming former President Obama’s life expectancy is in line with that of the general population, in today’s financial climate this pension is worth around $5 million. Not bad for 8 years in the job! However, if former President Obama had wished to maximise the value of his pension, he would have done better to serve for one term only. Given that the annual pension amount is set independently of service, this would have meant former President Obama effectively accrued a pension worth an incredible 1/8th of his salary for each year he was president. The pension would also have been paid from a younger age, and for a longer period of time, meaning its value would have been even higher.

Unfortunately for President Trump, the value of his pension upon leaving office will be significantly smaller given his 70 years of age. After one term, his pension will be approximately worth a measly $2.5 million and this value will only fall as he ages. However, President Trump can console himself with the thought that after one term he will have earned his pension at what is likely to be the largest effective accrual rate ever known. Given his pledge to receive a salary of $1 per year his effective accrual rate is approximately 53,500 – some 800,000 times larger than former President Obama’s.

Obama - goodbye tension hello pension2 (ID 1048104).jpg

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