A quarterly magazine of urban affairs, published by the Manhattan Institute, edited by Brian C. Anderson.
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What If Everyone Had a California State Pension? « Back to Story
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Man Ed--what a goofy premise----- could your article be more biased? If everyone had a big pension....if a frog had wings Ed.........
Public employee sector should have never been allowed to unionize, since they are working for the taxpayers, now the taxpayers are at the mercy of the greedy unions. I have no problem with private sector unions however.
Right. Exactly what the government needs is for the incumbents or their appointees to get to decide who is a serious candidate and who is not.
fred the cop says:
"I risk my life to provide protection to New York's population in exchange for a middle class salary."
Step aside if you're scared, fred. American soldiers in Afghanistan are in much more danger than you are, and they don't snivel about it. Relax, go have a donut.
Our soldiers also don't get nearly your pay – taken from already hard-bitten, unwilling taxpayers, in return for union votes.
Public employee unions are parasites on private workers, who don't get nearly their pay or benefits. In my city [in Northern California] cops are paid an average of $150,000 a year – not including benefits. That is outrageous, and it certainly blurs the line between politicians, public employee unions, and criminals.
Pols and unions have learned to game the system at the taxpayers' expense. They must be destroyed, by making public employee unions illegal, for being contrary to the public interest – just like parasites are destroyed wherever they're found. The taxpaying public deserves nothing less.
What California is doing is gambling to help close the gap between its promised pension benefits and its actual funded level of benefits.
Cal-PERS has been making double digit (10%+) returns the past couple of years but the typical safe rate of return has been 2% to 4%, with monetary inflation how climbing higher than that. Cal-PERS pension fund in tax exempt. So Cal-PERS earns something like 3 to 5 times the safe rate. This means that Cal-PERS has resumed its highly risky investing practices that got it into trouble in 2008 when it lost billions in bad real estate bets (investments).
To close the 20% gap between funded and promised pension levels Cal-PERS has assumed that it will achieve about 7.5% to 8% annual returns FOREVER; when in actuality the market has peaks and valleys that lower the average rate of return.
The credit risk of wipeout of its investments is also two to five times higher, meaning that California could experience another large decline in the value of its investment portfolio. A 10% rate of return assumes that an investor needs to get their principal back in about 7 to 8 years on a compound basis. So there is a risk of loss of principal every 7 to 8 years or so.
It's called California dreamin'.
Charles, I agree. I believe the country would be MUCH MUCH better off if campaigns were GIVEN a modest sum directly from the Gov't with no campaign contributions allowed (criminal offense to accept such) and no spending of personal wealth (to avoid "buying" elections).
As soon as large businesses and corporations and the very wealthy have their campaign contributions limited I think public employees should have their contributions limited as well.
Of course this would take things back to the days of Abraham Lincoln (who could not possibly be elected in todays political climate).
At the moment we have the finest government that money can buy.
If you want to knock off the employees who receive retirements based on five years of work or retired before 1999 then you need to knock off the $100,000 club and employees like myself who worked 40 years in a high end occupation.
Charles, It sounds like you are defining "achieves success" as simply belonging to a Union that has succeeded in bribing elected officials with campaign contributions and election support in return for favorable votes on pay, pensions and benefits.
You should be proud of this success !
A mortgage has a "current balance" that tells you how much you need to pay in cash to settle your debt today. But pensions do not have current balances: they are obligations to pay various amounts at different times in the future. There is no simple "full-size" liability to report. You could calculate a theoretical current balance by reducing the future payments to reflect the time value of money, and this the Stanford study does, using a risk-free interest rate of 4.14%. The result of this calculation for California public pension funds is $867 billion as of 2008. Since the funds held assets worth $442 billion that year, the study says they have "unfunded" (i.e. not yet funded) liabilities of $425 billion. But this figure is only useful if the state decides to get out of the pension business today and pay somebody else to take over its liabilities.
In contrast, the $55 billion in "unfunded liabilities" reported by the California funds in 2008 has an entirely different meaning. That figure might be properly interpreted as a snapshot of where we are now in the economic cycle, because it goes up and down from year to year depending on market performance and other fluctuating factors, and in some years there may be no such unfunded liability at all but a "surplus" instead. Over time the annual shortages and surpluses should average out. If a forecast predicts continued surpluses year after year then that suggests the pensions are over-funded. Perhaps that is what happened a decade ago when lawmakers voted to increase pension benefits? (If they really did base their decision on a single year's "snapshot" then I would agree that was very foolish.)
The two figures above are apples and oranges. If the Stanford calculation is what Crane calls "full-size accounting that would have shown a deficiency"...well, wouldn't this type of calculation ALWAYS show a "deficiency"? The whole reason to have a pension fund at all is to steer contributions into investments that beat the risk-free rate over the long term to meet payout obligations. If there were no such deficiency, we might as well get rid of CalPERS, give public employees their money back, and tell them to put it in risk-free investments like T-Bills to fund their own retirement.
And actually, the point of the Stanford study is not to argue about which discount rate to use when calculating liabilities, nor even to dispute whether pension funds can continue to earn investment returns at rates similar to historical averages. (In fact, when Stanford responded to comments made by CalPERS about the study, it explicitly supported the assumption of a 7.75% expected growth rate.) The real point of the study is to encourage decision-makers to base their policies on a different forecasting model that takes volatility into account. Rather than comparing current assets versus a single theoretical current value for liabilities, they should instead compare known future liabilities against a range of probable future values for assets. Stanford also recommends limiting the likelihood of shortfalls by adopting investment strategies that reduce exposure to risk, and by sticking to consistent contribution schedules instead of relaxing them whenever the market has a windfall.
None of this has anything to do with underreporting the size of liabilities. News media have picked up on this sort of hype, and described the $425 billion as "tax money that will have to be shelled out" to make up the difference between what the pension funds owe and what they have invested. But that is just baloney. Investment income beyond the risk-free rate was stripped out to arrive at that figure, remember? So you have to put it back in before you can talk about additional taxes. I for one support the Stanford study's recommendation that current law be changed to allow pension funds to reimburse the state general fund during "wildly successful" periods in exchange for temporary infusions when there is a "large market loss." In the long run the pensions should be self-funding (at least nominally, for the sake of good accounting...in reality everything from general fund infusions to employer and employee contributions to employee salaries themselves all come from tax dollars).
It would be interesting to apply Stanford's methodology--including the probability simulations--to pension data as it was available in 1999, and see if Crane is indeed correct that lawmakers would have come to a different conclusion back then. (I am not so sure.) The Alicia Munnell report he cites does not do this: it only says CalPERS assets that year were 88% of liabilities calculated using the risk-free rate. But as discussed above, this does not really tell us anything useful.
Crab mentality, sometimes referred to as crabs in the bucket, describes a way of thinking best described by the phrase "if I can't have it, neither should you." The metaphor refers to a pot of crabs. Individually, the crabs could easily escape from the pot, but instead, they grab at each other in a useless "king of the hill" competition (or sabotage) which prevents any from escaping and ensures their collective demise. The analogy in human behavior is that of a group that will attempt to "pull down" (negate or diminish the importance of) any member who achieves success beyond the others, out of jealousy, conspiracy or competitive feelings.
@Tough Love - If the 4.14 percent is not the assumed return on assets, then the $500 billion figure is merely theoretical, based on a particular interest rate, which can change, and indeed, has changed since this report was issued. Using this method for calculating liabilities, all that is necessary for that $500 billion to disappear is for interest rates to rise to 8.0 percent.
Pension plans don't operate in a world of economic theory. They have real assets and real liabilities and need real money. When all the economic theoretics are done, the plans need to pay their obligations, and current interest rates are not a helpful guide to informing policymakers how much money they need to fund the plans.
Using current interest rates to calculate a pension plan's unfunded liability produces a value reflective more of the underlying dynamics of the bond market than of the pension plans.
Although you may believe that a 7.75 percent return is "WAY too aggressive," over longer periods, the state's pension plans' returns have exceeded 8.0 percent.
In light of this history, I don't think 7.75 percent necessarily qualifies as too aggressive.
Ring's article gives an interesting way of quantifying the economic disaster ahead. But one of his points is a real clinker, the notion that immigration is going to significantly help the United States (at least in comparison to other countries facing the same demographic problem). Nope. The immigrants we're admitting are predominantly little-educated and low-skilled, i.e. they possess very little human capital. So they won't rescue us, unless all we need is an army of bedpan-emptiers.
Pensions decrease labor flexibility, decrease individuals control of their assets, and increase paperwork and bureaucracy. As a result pensions depress wages and return on capital. When individuals prefer them in the place of other compensation, all the more power to them to make their own contracts. As a society, hopefully our desire for better living standards will unite us in promoting higher productivity processes and norms, including compensation packages that do not include pensions.
Actually, everyone should get a pension. Germany manages to have a booming economy and pay all retirees enough to live on comfortably. Of course, their economic model is more advanced than our banana republic, in which the richest 1% own 40% of the economy.
Here's a perspective on how overpaid California's public sector employees are.
A California public school teacher averages almost $60K plus benefits for working 9 months per year. The likely consequence for poor job performance is promotion.
The Navy SEAL's that took out Bin Laden make about $54K per year and sometimes work around the clock for days on end. The likely consequence for their poor job performance can be loss of life.
I constantly hear California public school teachers whining about pay, but I've never heard a Navy SEAL complain.
inagaddadavida, You need to read up on this ....
The 4.14% economists suggest using is NOT the assumed return on assets, but the interest rate they deem appropriate for discounting the Plan liabilities (i.e., the amount and timing of expected pension payments to retirees) from the date of payment to the current date. A low rate is appropriate because of the high level of guarantees associated with the promise that these pension payment will indeed be made.
The confusion arises because Public Sector Plans generally use the SAME rate that they assume to earn on assets to discount the liabilities. Although this is allowed under Government Plan accounting standards, most economists and actuaries consider this way too aggressive. In fact, for the analogous calculation under Private Sector Pension Plans, not the assumed rate on assets, but a "market rate" based on the nature of the liabilities is used ... and at this time it tends to be between 5% and 5.5%. So, while the 4.14% may be on the conservative side, the 7.75% CA uses is WAY too aggressive.
It is a myth and a gross distortion to say that California's unfunded liability is $500 billion. This falsehood was concocted through a combination of depressed asset values from 2009 and a projection that the pension funds will earn 4.14 percent annual on their investments.
The state's pension fund assets have grown by more than 30 percent since the $500 billion was calculated. That growth alone would cut the figure to $350 billion.
No credible investment professional believes that a diversified portfolio of stocks, bonds, real estate, private equity, etc., will earn a paltry 4.14 percent over the next 30 years, but using it helps to inflate the unfunded pension liabilities.
California may be facing a pension problem, but let's be fair and factual about it.
James McRitchie, For discussion purposes, let's assume that of the total actual $ contributions necessary to fully fund a typical Public Sector DB Plan over the employee's working career, 15% comes from the employees with the balance the responsibility of taxpayers. That 15% is just about right, but it would be a distraction to try to prove it in the comment.
Granted, a large portion of the ultimate pension payout come from investment earnings, but since only 15% of the cost is paid for by employee contributions it is appropriate that only 15% of the investment earnings arose from those contributions. The balance of the investment earnings must then be associated with the taxpayer's contributions.
If you read my earlier comment (below) at 2:18PM, a new study demonstrates that Public Sector benefits are about 3 times more generous than those of the 20 largest Private Sector employers in CA.
If you give some thought to this it's hard not to come to the very reasonable conclusion that had taxpayers not been forced to provide such a grossly excessive Pension (and had to only provide one equal to that which Civil Servants get), 2/3 of their contributions AS WELL AS 2/3 of the interest earned from these contributions would have stayed in the taxpayers pockets.
The real point is that there are only 2 original sources of funds that pay for Public Sector pension Plans, the employees and the taxpayer. Interest is NOT a "source" but arises AS A RESULT OF the REAL contributions and is proportionally associated with the original source.
This isn't a "thought" experiment, it is a brainless experiment that doesn't consider that the vast majority of payout come from earnings. This "thought" experiments doesn't even appear to count the money employers and employees put into the system over 30 years of employment.
Yes, it it would cost a lot to give everyone in California a free house too! That's about the level of absurdity.
Ed: Fantastic article. As a consulting pension actuary with spreadsheets to calc this stuff, I can flatly say that a worker from 25 to 55 with 3% pay increase each year finishing up with a bit over $70k pay at age 54, to get a 70% or $55,000 for life, that will increase with COLA each year is getting a bundle. If assets earn 6% from age 25 to 85 at expected death, the annual contribution would have to be nearly 30% of pay each year for those 30 years of working. This is outrageous -- full retirement at age 55 with RollsRoyce pension and health care -- worth millions -- and just the pension cost is 30% of pay each year. This is fairly consistent with your answer in total for the whole economy -- wages are about $9T/year, so pension costs for each year of working would cost $3T with these assumptions. Incredible. Fleecing of private sector has occurred!
Pied Piper, Most Plan have a minimum period (rarely less than 5 years) before you "vest" the Plan benefits you have accrued. You should check, but it's likely you were not vested.
However in such cases, you are generally entitled to get back your own contributions. Perhaps you did so (when you left) but don't recall.
I worked for the State of California for the Unemployment Insurance Office back in the 70s. (That's when you interviewed benefit claimants face to face and had to be ready for nastly confrontations....not like today when it's all done over the computer and you never see your "client" personally).
However, I only worked for 2 years and resigned for another job. (I'm still glad I did).
Given that this is the "age of entitlements", shouldn't I still be eligible for some kind of retirment benefit?
If currently you get $55,000 after 30 years, I figure with 2 years, that comes out to $1833/year or $152/month. I'd settle for that.
Wonder who I should approach regarding this issue.
Ed, Nice perspective ... an alternative to the usual approaches.
This week a study was released that said for the average California worker with a $60K salary, the annual value of pension and retiree healthcare benefits is $19K vs $6K for the 20 largest Private Sector companies ... more than 3 times as much.
Some commentators have said this justifies asking Public sector employees to pay more towards their pensions & retiree healthcare, but lets examine this:
Assuming cash pay in the 2 sector is comparable so that there is no justification for higher accrual of retirement benefits for Public Sector employees, these employees would have to contribute an additional $19K-$6K=$13K annually, which is $13K/$60K =21.6% of pay to erase their current advantage.
There is NO WAY they would (or realistically could) do this. This supports the position I have taken for a long time.... the ONLY solution is a DRASTIC (50-75%) reduction in the rate of pension accrual for future years of service, or better yet, a hard freeze on existing DB Plans with conversion to a 401k-style DC Plan with an employer match similar to what Private Sector employees get from their employers.
I would love, absolutely love to retire with 50+k a year. Unfortunately, in TN after 35 yrs service, my annual comes to about 22k.
Public worker pensions are not the cause of our fiscal crisis. When I became a New York City Police Officer, many people derided us as suckers, calling us "New York's Poorest." A few years later, these same people have deduced that our pensions have caused the financial crisis.
I am not on welfare. I risk my life to provide protection to New York's population in exchange for a middle class salary.
What the writers in this magazine want is a return to a guilded age where there are a few billionaires and everyone else is poor. They try to pit workers against each other to achieve this.
How about we consider that the richest 1% of our population has become exponentially richer over the past thirty years while most workers have lost ground? You will never hear those words from this magazine. I'm sure they've earned every penny they have, while us greedy workers are living the good life.
Let's say I'm a public official negotiating with a public-services union. If I negotiate them a sweet pension package, I get advantages in the here and now.
The costs don't fall on me. They don't fall on today's voters. They fall due decades later, on other people who can't trace the harm back to me and get even.
That's why defined-benefit pensions should be off the table for public employees. Any defined-contribution package that workers can wangle for themselves has to be paid in the here and now. That's a cost that the voting public can see and react to.
Public employees, like anyone who works, deserve to be paid, and the voting public will understand this point. Public employees will get a fair deal.
They won't get an impossibly expensive, incomparably sweet, deal.