Pensionomics: Fighting yesterday’s battle?

A newspaper article last month reassuring the public that CalPERS will weather the current financial crisis contained a very big number.

“CalPERS adds as much as $35 billion per year to the California economy,“ the president of the California Public Employees Retirement System, Rob Feckner, wrote in an op-ed piece in the Sacramento Bee.

Is the huge number more ammunition for the critics who contend that public pensions are overly generous and “unsustainable,“ a growing cost for state and local governments that endangers funding for other programs?

Actually, it’s a reference to studies commissioned two years ago by CalPERS and the California State Teachers Retirement System that measured the economic impact of the nation’s two largest public pension funds.

The main issue then was whether public pension funds that give retirees a lifetime monthly check should be switched to the 401(k)-style individual investment plans now common in the private sector.

When they released the studies, CalPERS and CalSTRS made no mention of the debate over the merits of “defined benefit” monthly pensions liked by many employees and “defined contribution” 401(k)-style plans that do not put the employer in debt.

But two years ago organizations that include CalPERS and CalSTRS formed a think tank-like organization based in Washington, D.C., that has a zest for battle, the National Institute on Retirement Security.

Last February the institute issued an analysis of the economic impact of all public pension funds in California, using data from 2006 like the CalPERS and CalSTRS reports and the same well-known economic software model.

But the institute’s news release was quite different from the just-the-facts announcement two years ago of the studies done for the two California funds.

“Understanding the considerable economic impact of California’s public pension funds is vital given the severe financial crisis facing America,” Beth Almeida, the NIRS executive director, said in the news release.

“Economists have long known that the steady monthly income provided by pensions can act as an ‘automatic stabilizer.’ That is, retirees with a stable monthly pension income can continue to spend on basic needs, even during an economic downturn.

“In contrast, retirees relying solely on plummeting 401(k)s or individual retirement accounts likely are forced to retreat from spending precisely at the time when the California economy most needs stimulus.”

The report said public pension funds in California paid $23.5 billion in pension benefits to 976,233 retirees and beneficiaries in fiscal 2005-06. As the money was spent, the “multiplier effect” produced a total economic impact of $34.5 billion.

Coincidentally, the institute’s total is identical to the $34.5 billion mentioned by Feckner for the economic impact of CalPERS alone, not counting the rest of the public pension funds in California.

But the CalPERS total, including the “multiplier effect,“ came from investments $15.1 billion, monthly benefit payments $11.8 billion, and administering government health programs $7.6 billion.

The average monthly benefit check that CalPERS sent to 441,277 retirees, survivors and beneficiaries was modest: $1,876.

Another study done by the retirement institute concludes that “the cost to deliver the same level of retiree income to a group of employees is 46 percent lower in a defined benefit (pension) plan than it is in a defined contribution (401k) plan.”

The institute’s Almeida and others contributed a chapter to a book published last year by the Oxford University Press, “The Future of Public Employee Retirement Systems,” that argues opposition to pensions is not a response to economic factors.

“There does not appear to be a groundswell of discontent on the issue of public pension and no demand rising up from ordinary citizens for wholesale changes,” said a synopsis of the chapter. “Instead, efforts to dismantle public pensions have been tied to partisan politics and organized ideological interest groups.”

In California, the current battle lines seem to have shifted to cutting benefits as a way to control public pension costs, rather than switching from guaranteed monthly checks to individual investment accounts that rise and fall with the market.

Four years ago Keith Richman, who was then a Republican assemblyman from Northridge, briefly got the support of Gov. Arnold Schwarzenegger for a proposal to switch all new state and local government hires to 401(k)-style plans.

Now a group formed by Richman and others, the California Foundation for Fiscal Responsibility, is working on an initiative for the November ballot next year that would cut public pension benefits for new hires and push back retirement ages.

The group has a well-publicized database of persons receiving annual CalPERS pensions of $100,000 or more. An added bonus was national publicity about Contra Costa County fire chiefs who retired at age 50 with pensions far greater than their final salary.

Schwarzenegger made his own proposal last June to roll back pensions for new state workers to the level that was in effect before a major benefit increase was legislated in 1999.

Why cuts for new hires but not current employees? The courts have ruled that pensions are a vested right that can’t be cut unless offset by something of equal value.

There have been some attempts to reduce the cost of pensions promised current public employees.

Schwarzenegger signed a bill last weekend, SB 752 by Sen. Lou Correa, D-Santa Ana, that gives Orange County employees the option of choosing a “hybrid” plan that includes a pension and a 401(k)-style plan. But skeptics expect few takers.

In some cities in San Diego County, payment of the employee share of pension costs required through CalPERS will be shifted from the city to workers. But employees in many pension plans, including state workers, are already making their own pension payments.

Paul McCauley of Santa Monica has filed an initiative that would reduce generous pensions after the fact by taxing them. But McCauley, an idea man and frequent filer, lacked the means to gather the signatures needed to put his past measures on the ballot.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 15 Oct 09

4 Responses to “Pensionomics: Fighting yesterday’s battle?”

  1. TOUGH lOVE Says:

    Quoting …”Why cuts for new hires but not current employees? The courts have ruled that pensions are a vested right that can’t be cut unless offset by something of equal value.”

    Somehow, if it does not want to go broke, California and its cities & towns are going to have to figure out a way to reduce pensions & retiree healthcare for FUTURE (not PAST) years of service for CURRENT employees.

    Changing the pension formula only for NEW employees will not save anything for 20-30 years, and Ca. has MAYBE 2-3 years left to sting this out before the “party’s over”

  2. Jim Reilley Says:

    Tough nuts for Tough Love – Ain’t gonna happen. You’d be better off preparing for that 20-30yrs with contingency plans and focusing on new hires. It’s like trying to make the sun rise in the west and set in the east – maybe it would be better but it wont happen.

  3. TOUGH lOVE Says:

    Dear Jim Reilley (obvious Civil Servant and trough feeder).

    Yes it will, when it becomes obvious that these is no money left .. 2, possibly 3 years. (max).

    I suggest you prepare the grocer will only take your pensions “script” in lieu of cash, for so long.

  4. hank Says:

    TOUGH lOVE we need to get rid of the public pensions and social security, why should anyone get money from the state or feds for nothing just being alive . we should ALL be treated equal. and if people can’t save money in a 401k to live on that’s “TOUGH lOVE” keep working. Or there is living on the street or find a friend that has money or a job or how about living under a freeway. The 401K was introduced to be used in addition to a private defined pension plan to help give retirees a more comfortable retirement not as the sole source of income for retirement . But the big corporations used the plan as a tool to get rid of their pension obligation by saying here employees we will give you all your defined pension money and you do what want with it. And people , blew their wad on what ever . GROW UP AND GET YOUR FACTS!!!

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