Gov. Brown pushed through legislation that cuts and caps public pensions for new employees, making a fix-it-to-save-it argument while bypassing the bargaining usually demanded by his labor allies for benefit changes.
Voters needed assurance the governor’s tax hike on the November ballot would not be eaten up by pension costs, and inaction might fuel an initiative drive for radical change, possibly a switch to a 401(k)-style plan.
Brown said the pension reform bill that took effect Jan. 1 was “the biggest rollback of public pensions in California history,” a package that will “save tens of billions of taxpayer dollars” and make pensions “more sustainable.”
How does the bill pushed by a Democratic governor through a Demococratic-controlled Legislature compare with the pension reform efforts of two Republican governors, Pete Wilson and Arnold Schwarzenegger?
Here’s some recent history, beginning with a pro-and-con look at the condition of public pensions.
Pension critics said Brown’s bill is a “small” or “first” step. Much more needs to be done to cut the pension debt or “unfunded liability.” As in the private sector, pensions earned by current workers for future work must be trimmed, even if it takes a court battle.
One of the fastest-growing government costs, retiree health care, needs to be cut and pre-funded like pensions, so investment earnings can cover future costs. Underfunded CalSTRS needs legislation to get more money from employers and perhaps teachers.
The bill does not contain Brown’s proposal for a federal-style “hybrid” combining a smaller pension with a 401(k)-style plan, which makes employees share some of the investment risk now borne only by employers and taxpayers.
It’s only legislation, not a constitutional amendment approved by voters. Future legislation can slowly chip away at cost-cutting reforms or erase them all with one swift end-of-session deal.
Relief is needed for independent big-city pension systems that, with their high personnel costs, are on the bleeding edge of high pension costs. But the legislation only covers CalPERS, CalSTRS and 20 county systems operating under a 1937 act.
Voter-approved measures in San Jose and San Diego, desperate attempts to cut current worker costs, may be tied up in court for years. Los Angeles projects soaring retirement costs but seems politically paralyzed, as if zombified, a walking dead man.
Bankruptcies in Stockton and San Bernardino, as in Vallejo before them, seem unlikely at this point to result in much if any pension-cost relief, even for cities that have slashed vital police and firefighter services.
Pension supporters have a different view. After a major market crash and recession, CalPERS and CalSTRS still have roughly 70 percent of the projected assets needed for future obligations, a funding level not regarded as dangerously low by many.
Payments to CalPERS for state workers, $3 billion in fiscal 2008-90 when the stock market crashed, are $3.7 billion this year, thanks to increased worker contributions and a loose actuarial policy, which may be tightened if an economic upturn continues.
CalSTRS finally got legislators to consider a funding solution. Three options are due Feb. 15. Unlike most pension funds, CalSTRS lacks the power to set employer rates. And without a rate increase, it’s said to be on a path to run out of money in three decades.
The pension debt or “unfunded liability,” which balloons to eye-popping levels when “unrealistic” earnings forecast are lowered, is overrated as a gathering cloud of fiscal doom. It’s a debt of uncertain size that may or may not have to be paid.
Unlike stable bond debt, the pension “unfunded liability” can have huge swings, up or down. It’s the gap, over 30 years, between two moving targets: the estimates of future pension costs and of future revenue from employers, employees and investments.
The “unfunded liability” is based on what’s needed for 100 percent funding in 30 years, a seldom-reached goal and a mixed blessing. Full funding often creates pressure to cut contributions and raise pensions, which can lead to underfunding again.
The big variable is investment earnings, often expected to provide two-thirds of the revenue. If the 30-year earnings forecast is dropped from about 7.75 percent to 4 percent, as Stanford Graduate students showed, the unfunded liability can balloon tenfold.
But if investment earnings average 16 percent for five years, actuaries said last April, the California State Teachers Retirement System would be fully funded. The unlikely but not impossible earnings would erase a $65.4 billion “unfunded liability.”
The Brown pension bill (AB 340) gives new employees of state and local government in the three systems lower pensions than current workers and requires the new employees to work longer to receive full pension amounts.
Pensions earned by most new hires will be capped at the top salary taxed for Social Security, last year $110,000 and growing with inflation. About 19,000 CalPERS and CalSTRS current retirees receive $100,000 or more, and one peaked at $500,000.
A single pension formula ends labor bargaining for higher pensions, an escalating scale that for California Public Employees Retirement System members in local government provides as much as 120 percent of final pay after 40 years on the job.
The new pension formulas for general and safety workers are a little lower than the formulas used before a major state worker pension increase, SB 400 in 1999, now said by critics to be a key factor in “unsustainable” pension costs.
Brown’s bill makes it more difficult for new hires to boost or “spike” pensions, a crackdown sparked by a report that two Contra Costa fire chiefs retired at ages 50 and 51 with pensions far above their pay — a $185,000 salary and $241,000 pension in one case.
Court rulings are widely believed to mean that pensions promised current workers on the date of hire cannot be cut, unless offset by a new benefit of equal value. But the bill requires some current employees to begin paying more each year for their pensions.
For a third of state workers, pension contributions will increase by 1 to 3 percent of pay to bring them up to the new target. If local government workers are not paying their new share by 2018, an increase can be imposed through a bargaining impasse.
The bill expects employees to pay half the “normal” cost, an amount intended to cover pensions earned during the year. Employers pay the other half and any “unfunded liability” if projections miss targets, now a large debt mainly due to investment losses.
For all employees retiring after Jan. 1, the bill limits “double dipping” (returning to a government job after retiring with a pension), prohibits the purchase of unserved “air time” to boost pensions and allows the elimination of pensions for job-related felonies.
For CalPERS, which covers about half of the non-federal government workers in the state, the bill is expected to save $43 billion to $56 billion over the next 30 years. In present day dollars, the savings are $12 billion to $15 billion.
Former Gov. Wilson pushed through legislation in the early 1990s that gave new state hires a much lower pension and shifted control of the powerful actuaries, who set annual rates that must be paid by employers, from CalPERS to lawmakers at the Capitol.
Wilson also obtained legislation that shifted $1.1 billion from CalPERS inflation-protection funds to the deficit-ridden state general fund. The fund shift was overturned by the courts.
But the big blowback came from public employee unions, who called the shift a “raid” on retirement funds. The unions put a constitutional amendment on the ballot, Proposition 162 in 1992, that strengthened CalPERS and other public retirement systems.
The initiative, approved by 51 percent of voters, gave public pension boards total control of actuaries and all system funds. To prevent lawmakers from tampering with pension boards, a public vote is required to change board composition and operations.
And importantly, in the view of some, providing benefits to retirees was made the top priority of pension boards. Formerly minimizing costs for employers and taxpayers had equal standing with providing benefits to retirees.
When Brown’s first-term chief of staff, Gray Davis, became governor he erased the Wilson pension cut by signing the landmark pension increase for state workers, SB 400 in 1999, that sailed out of the Senate on a 39-to-0 vote.
Now SB 400 is vilified by pension critics as a costly trendsetter, particularly for local police and firefighters, that granted excessive, retroactive benefits the sponsor, CalPERS, misleadingly said would not cost taxpayers “a dime.”
Former Gov. Schwarzenegger’s proposal to close a state budget gap in 2004 included a $949 million bond to help pay pension costs. To pay for the bond, the state stopped making pension contributions for new workers during their first two years.
Pension contributions made by the new workers went into a 401(k)-style investment plan called the Alternate Retirement Program. After two years, the worker contribution automatically switched to CalPERS.
Then workers were given three options for their two years of contributions: take the money in a lump sum, leave the money in a 401(k)-style plan or transfer the money to CalPERS and receive two years of service credit toward a pension.
The CalPERS board was told in June 2010 that 44 percent of the workers failed to make a choice, which left their money in the 401(k)-style plan.
The proposed 20-year pension bond and later smaller versions were never issued, blocked by a taxpayer group lawsuit successfully arguing a vote of the people was needed. Brown’s pension bill ended the Alternate Retirement Program.
Schwarzenegger briefly backed a proposed initiative in 2005 to switch state and local government new hires to 401(k)-style plans. He dropped his support after union-sponsored TV ads said police and firefighters would lose death and disability benefits.
In his last year in office, Schwarzenegger used a record 100-day budget deadlock to get the largest state worker union to agree to raise the pension contributions of current workers and give new hires a lower pension.
Responding to the issue of whether CalPERS investment earning forecasts are too optimistic and conceal massive debt, Schwarzenegger obtained legislation requiring a detailed analysis of employer rate changes and an opinion from the state treasurer.
The nonpartisan Legislative Analyst said the bill was unworkable. Followup legislation last year streamlined the procedure to show what happens short term if earnings are 2 percent below or above the forecast, now 7.5 percent for CalPERS.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 3 Jan 13
Calpensions 
January 3, 2013 at 4:59 pm
Quoting the key paragraph, (leading to these grossly excessive pensions) ………….
“And importantly, in the view of some, providing benefits to retirees was made the top priority of pension boards. Formerly minimizing costs for employers and taxpayers had equal standing with providing benefits to retirees.”
January 3, 2013 at 6:51 pm
“In present day dollars, the savings are $12 billion to $15 billion.”
Is that calculated using the same discount rate that applies to the pension fund deficits?
January 4, 2013 at 3:17 pm
I think the key paragraph was one up from that, Tough Love:
`The initiative, approved by 51 percent of voters, gave public pension boards total control of actuaries and all system funds.’
The voters decided to do it. The buck stops there. And I’d not overlook the later paragraphs:
`When Brown’s first-term chief of staff, Gray Davis, became governor he erased the Wilson pension cut by signing the landmark pension increase for state workers, SB 400 in 1999, that sailed out of the Senate on a 39-to-0 vote.
Now SB 400 is vilified by pension critics as a costly trendsetter, particularly for local police and firefighters, that granted excessive, retroactive benefits the sponsor, CalPERS, misleadingly said would not cost taxpayers “a dime.”’
That Davis and the entire state Senate were so ignorant as no not know that the stock market can actually go down for extended period (like between 1929 and the 1940’s, or, between 2008 and now) is a major travesty.
I’m sure, Tough Love, you will say that 51% of the voters, every State senate member (of both parties), and Gray Davis were bought and paid for by California unions. I don’t buy that.
Never postulate a conspiracy when simple ignorance will do.
January 4, 2013 at 5:48 pm
Quoting spension ….”I’m sure, Tough Love, you will say …..”
I’m sure you tell yourself each day how are brilliant you are (and apparently clairvoyant), but would you mind NOT tell ME what i would say.
I’m quite capable of speaking for myself … to the chagrin of most Public Sector workers I’m sure.
January 4, 2013 at 8:59 pm
Yes you are, and pretty much every other time this subject arises, Tough Love, you say the politicians are bought and paid for by the unions, and you say nothing about the ultimate responsibility resting with the voters in a democracy.
January 6, 2013 at 4:17 pm
Spension: If 51% of voters approved a constitutional amendment that said the top 10% shall give their entire net worth to the state, would that pass muster with you?
Democracy depends on limited government, otherwise it’s just 2 wolves and a sheep deciding what’s for dinner.
Who will pay the City of San Bernardino’s CalPERS bill when roads become impassible, fires go un-faught, and crimes go uninvestigated… so people and employers just leave the city?
Detroit has 25% fewer residents than it did a decade ago. That means the remaining residents will have to pay 33% more than they used to. In CA, that’s hard to make happen, given Prop 13, caps on local sales tax adders, and no local income taxes.
The entire public pension system is a broken design that has merely taken time to break. It’s breaking now. Other than point a gun at fellow Californians and say “you have to pay”, what do you propose? Oh, wait, I know… you believe CalPERS will create magical earnings, contrary to recent history. And if they don’t? What then? Seriously… I want to know. Do you really believe that the entire state budget should go FIRST to pay people who aren’t working, and only after they’ve been paid their pensions and health care can we begin to think about paying current employees and providing other benefits to the poorest Californians?
Ultimately, that’s what it comes down to. It’s a question of priorities.
It may take a special statewide income tax… say 50% on income received from CalPERS or CalSTRS pensions… voted on by the state’s voters and enshrined in the state constitution. Maybe that one will pass with 51% of the vote, too. Maybe more when people have to decide between sending their kids to empty schools or schools with teachers in them.
January 6, 2013 at 9:29 pm
Nice article comparing 401(k) DC plans with DB plans…
Click to access 06feb.pdf
From 2006, well before the current crisis.
For example, points out that fees in 401(k) plans are usually 0.4% higher than in DB plans. Might seem small, until you realize that that 0.4% should be compared with the yearly annualized return… let’s say, 7%. So, 0.004/0.07 = 5.7% per annum taking of returns for fees.
Compound that over, say, 30 years, a typical saving duration for retirement…. (1-0.057)^(30)=17%, or , 1/6 the total gains in the 401(k) relative to the DB. Now that is a bit too conservative.
Nevertheless, you end up with a *lot* less money in a 401(k) due to the taking of your money by fees. Never hear the DC plan advocates utter clear, numerical statements on this problem… perhaps because the investment industry lobbies for 401(k)’s and the bigger take they bring.
Lots of other comparisons are in that article.
Now I think the DB benefits in public California plans were raised way too high (unanimously by our State Senate in 1999). And I think we face either Sovereign Default or systematic reduction in public retirement benefits, which must be done voluntarily by the pensioners and their organizations (and is thus very unlikely).
But going to DC plans is stupid-squared.
January 7, 2013 at 1:12 am
Richard, at the age of 77, I can’t exactly go back to work if my pension is cut in half. I already use over 30% of my net, take-home pension to pay for medical insurance for me and my spouse. My pension is legal, was earned according to the rules, and is constitutionally sound. The country has lived through depressions before and it will live through this one too. And, it won’t be at a sacrifice of any portion of my pension.
January 7, 2013 at 4:36 pm
SeeSaw, I understand. My 91-year-old mother-in-law also depends on her CalPERS pension. But you’re missing the point of my post… no one wants to see current pensions cut.
But SB400 is simply unaffordable. So I encourage you to encourage your union and CalPERS to take a more rational (yes, rational) position. Because if they continue to irrationally (but legally) maintain that a) all pension benefits ever promised must be paid; and b) must be paid regardless of CalPERS returns; and c) must be paid before any other government obligations, including current police, fire, teachers, etc., I absolutely guarantee you we will end up with the kind of referendum I referred to.
Your pension may be legal, constitutionally sound, etc… your particular pension may not even be “unaffordable”. But in the aggregate, today’s public sector employees and recent retirees are simply forcing governments to choose between paying people to not work and paying for essential government services.
It’s a question of priorities.
spension: There’s a lot more to the DC vs. DB equation than returns, though those are certainly material. But I’ll point out that a modern index fund has lower costs than even a DB plan.
For an example of other issues to consider in the DC vs. DB debate, here’s is just one. Inheritability. The essential feature of DB vs. DC is not all the financial numbers, but who gets your retirement assets when you die. In a DC plan, it goes to your heirs. In a DB plan, it goes to your longer-lived peers. DB plans might even be considered “racist” under disparate impact theory, given the different ages at death between the races, even among DB plan participants. Imagine paying in to a pension plan for your entire working career and then dying the day after retirement… compared to my 91-year-old mother-in-law.
DB plans are just another way we’re shortchanging our kids. Before their advent in the early 20th century, all we had were, effectively, DC plans… and those essentially all self-funded with after-tax dollars. So people tended to work as long and as hard as possible, because no one knew how long they’d live… and parents did not want to be a burden to their children, and wanted to leave them a legacy. With DB plans, we try to retire as soon as possible and we leave nothing to our kids, but the debt used to backfill over-optimistic estimates of future returns…
January 7, 2013 at 5:00 pm
Welcome to democracy, Richard. Recall that initially, circa 1910, when the 16th amendment was passed that allowed income tax, only the very wealthy were supposed to pay it. So a steeply progressive income tax is constitutional.
If I recall, the highest marginal income tax rates were once 90%, perhaps during WWII.
“Spension: If 51% of voters approved a constitutional amendment that said the top 10% shall give their entire net worth to the state, would that pass muster with you?”
Not with me.
“The entire public pension system is a broken design that has merely taken time to break.”
The design was quite good, much better than DC plans. Benefit rates were raised unreasonably high, unanimously by our State Senate and signed by our Governor. (Although that Governor, Davis, was a Democrat, Schwarzenegger supported similarly high benefits, as did Republican legislators in the 2000’s.)
That broke the system, not the design: DB plans are simply more efficient than DC plans, if benefits are not excessive.
My retirement savings are in DC plans, BTW.
January 7, 2013 at 6:58 pm
Richard, as a retiree, I do not belong to any union, and I have no professional representation when it comes to my pension. I was in a union when I worked. Public unions were not in existence for the first 50+ years of the existence of DB pensions in CA. CalPERS does not negotiate with unions. Get that mantra out of your head.
January 7, 2013 at 7:28 pm
SeeSaw, your benefits were negotiated for you by a union. I know you’re no longer a member of that union. You *do* have professional representation with respect to your pension, however. It is CalPERS. That is why I encourage you to speak up, to your former union, and to CalPERS, saying that you do not want newer, excessive pension benefits to put at risk your pension benefits… which is what is happening.
You can play ignorant and entitled all you want, but when push comes to shove, you’re counting on the same ignorant people who passed SB400 to distinguish between your relatively modest pension (I’m assuming you retired pre-SB400) and the much richer benefits SB400 promises. I’m not sure that’s a wise bet.
Spension, it sounds like we’re close to on the same page. I disagree about the “design being quite good”… the design inherently depends on a growth, which is not a safe assumption. It also depends on death at a rate predictable far in advance, which is also not a safe assumption. It also depends on DB not changing people’s behavior relative to DC… which we now have ample evidence isn’t true.
We’ll agree to disagree about whether DB plans (dependent on poorly incentivized DB plan administrators) are “more efficient” than DC plans (which depend on a poorly educated population). I can solve the DC education problem over time. I have no solution to the poorly aligned incentives of DB plans, especially on the scale of CalPERS. I can find an insurance company that will take the risk out of my education (it’s called an annuity). I cannot find an insurance company that will take the risk out of a 7.5% guaranteed rate of return, plus inflation. That’s a design flaw, in my opinion.
January 7, 2013 at 11:30 pm
No Richard, I have no connection, whatsoever, to my former union. But, yes, I do belong to and communicate with CalPERS and RPEA, which is a non-government retiree organization that works to protect my pension. I certainly would never advocate for nor request cutting the pensions of workers who have current, legal pension contracts, regardless of the formulas in effect.
It is not necessary for all employee groups participating in collective bargaining to belong to a union. My own group did its own bargaining for many years after my employer joined CalPERS. Our collegues did our bargaining, and there were no dues. When we joined a union about ten years in, our dues were less than $15/mo.
No, I did not retire prior to SB400. I retired in 2007, and after the legislature passed a Bill in 2001, allowing respective entities to consider upgrading the pension formulas for miscellaneous workers. I received a 3% formula, which was not widely adopted by public sector entities–I don’t think the State ever did so. The CA Public Employees Pension Reform Act of 2013 wiped out such formulas for future workers–there is no need for me or you to do anything. The pensions contracted prior to the CPEPRA will be honored–as they should be. Many public agencies, mine included, started reforming their own pensions years ago.
January 8, 2013 at 1:55 am
SeeSaw, due to your age (mid 70s ?), you may indeed collect all that was promised you. Those 20 years (perhaps even 10 years) younger likely will not.
January 8, 2013 at 4:12 pm
Richard… good actuarial practice is what has always been needed in CalPERS, CalSTRS, UCRS… but they have violated good practice. There are plenty of public DB systems in the US that are doing just fine. Not everyone has the California problem. There are even a number of blue-chip US companies who maintain their pension plans and have soberly avoided the drama of GM, GE, etc.
The incentive in a DB program is to maintain your health and live a long time… a good incentive in my opinion.
CalSTRS and UCRS have expense ratios (including disbursement, etc) of 0.15%, which is lower than Vanguards’ average 401(k) expense ratio of 0.2%. However, most companies with 401(k) plans don’t use Vanguard, and are entitled to charge extra fees of their own (and do… some terrible cases of that happening after the 2008 downturn… companies deciding to dip in to their employee’s 401(k)s). The industry average is near 1% expense ratio, and 2% is not uncommon.
Now CalPERS has a high expense ratio of 0.5%. And that is partly why CalSTRS and UCRS have stayed out.
Private annuities are notorious for high fees too. Of course Vanguard has a good variable annuity program.
January 8, 2013 at 4:14 pm
SeeSaw… I see… you’ve got yours, screw the kids. Nice attitude. Have a good life. Hopefully the courts will decide in San Bernardino’s favor that – as you say – you have a contract, and, like all contracts, are subject to modification in Federal bankruptcy court.
After all, bonds are contracts, too. It’s especially ironic in the cases where the bonds issued were specifically to pay pension fund contributions… Seems those bond contracts should be every bit as “inviolate” as the contract you have.
January 8, 2013 at 7:17 pm
rrelph, I got my pension legally and fairly; it is not extravagant. I am very generous to other people, especially to my family–(there is one adult child in another state, who was a crime victim seven years ago and is disabled for the rest of his life– he gets his rent paid out of my pension.) Other than my family, there is no state I care about more than I care about CA!
Get over your own envy of other people, and maybe things will work out for you.
January 8, 2013 at 8:41 pm
SeeSaw… legally and fairly doesn’t make it sound and just. Neither does it’s modesty. It’s not envy I feel, and it isn’t towards you at all. It’s anger towards politicians who vote for things they do not comprehend. Sadly, it seems you’re in that boat, too.
CalPERS has failed to hit it’s target returns. Retirees are not dying at the rate predicted when they were hired decades ago (that’s a good thing.) The size of liabilities due is higher than expected for myriad reasons. None of this is anyone’s fault, of course… no one can be fired, never mind sued for being overly optimistic.
But the LEAST at fault people are the taxpayers. Taxpayers who weren’t born why my mother-in-law started her career.
You keep saying how innocent you are… how entitled you are to the pension you have… Well, willful ignorance coupled with good intentions may win you an election somewhere, but eventually the limits of limited resources will make themselves felt. You may or may not be around to see that limit hit, but your kids or grand kids will be.
Educate yourself not just on the law, but on the dollars and cents, the assumptions made by past legislatures that have ALL been too optimistic. Because the disabled people in my family still live in this state and I don’t want to have to choose between taking care of them or taking care of you…
But if you continue to be ignorant of the hard math, hiding behind “legally and fairly”, I’m telling you here and now you will force everyone in the state to make that decision that no one wants to make. And you won’t like the way the decision goes.
Judges cannot fill bank accounts. They sign orders on paper, but they cannot write checks. They cannot expand the wealth of a person, a city, or a state. They cannot make billion dollar deficits disappear.
There’s still time to step back from the abyss… and without cutting your pension at all. But we have to start by doing the hard math and admitting that some of the youngest state employees will not get what is currently promised them. If we don’t, if we continue to pretend that taxpayer’s pockets are infinitely deep and can cover for shortfalls at CalPERS AND maintain ever-more-expensive government at every level, the end result will be much more painful for all.
You may not like decelerating at 3Gs… but it is a heck of lot better than hitting the brick wall. Which is what will happen if we don’t step on the brakes. Now.
January 8, 2013 at 9:34 pm
You can choose to fret; I choose to go on and live my life.
January 8, 2013 at 9:36 pm
Keep in mind that I am a taxpayer, as are all of the other public employees in the State.
January 8, 2013 at 10:47 pm
Brown’s pension bill: the biggest ‘rollback’?
Overall this article does a decent job of tackling a big topic. However I think the writer took too big of a bite. CalPers and CalSTRs are two different systems and the only thing they have in common is California. Do individuals intertwine themselves in both systems? Sure they do. Are the systems big? Yes. Do big systems generate waste. Of course. Can anyone say with a straight face that 401k’s or annnuities aren’t subject to waste and fraud?
I challenge the writer to write two articles. One focusing on PERS and the other on STRS. What are going to be the the effects of the new health care legislation on these two systems (i.e. Total Compensation)? How do these systems interface with our currect income tax system. If a person receives a pension from STRS they are subject to the Social Security Offset not to mention STRS benefits are subject to Federal tax. Maybe it would be better for all Public employees to pay into a 401k Roth and not pay any Federal tax on their distributions after they retire.
I think its time to have a real conversation about two systems that are really different.
January 8, 2013 at 11:31 pm
spension, good actuarial practice is a necessary condition, but it isn’t sufficient sadly. And even sound actuarial science will be accompanied by a confidence qualifier to allow for “unforeseeable” situations. Like California falling in to the ocean… 😉 Or, more pleasantly, a cure for cancer and heart disease. This is the foundational design flaw of all DB systems. The 1% chance that the parameters considered won’t include everything that needs to be considered. That 1% is guaranteed to happen sooner or later.
Technology – medical technology – has become disruptive. Lives are thankfully being extended, but that’s to the chagrin of the estimates made 70 years ago… or even today. One only has to watch “60 Minutes” regularly to see that almost nothing in the human body can’t be replaced… at a cost, of course. The mind/brain/soul is about the only thing not replaceable in the foreseeable future, and even that is on the horizon given Moore’s Law. Well within the lifetime of today’s new hires, we should have machines that match the performance characteristics of the brain… and 3 years after that, double it.
Pension systems depend on deaths, at a predictable (if undesirable) rate. They depend on returns on assets being somewhat predictable. Ask the Japanese about that one…
Expecting our kids and grand kids to pay for the mistakes (even honest mistakes) of our generation in estimating these things is immoral, pure and simple. It may be legal, but it isn’t right, just, or moral.
January 9, 2013 at 12:21 am
As a public sector employee, non-teacher, I did not pay into SS and I am subject to the 2/3 GPO, and do not receive the spousal SS benefit that the non-working spouse of a millionaire would get. Not complaining–just stating a fact.
January 9, 2013 at 12:41 am
CalPERS pensions are also subject to federal income tax, just like STRS pensions.
January 9, 2013 at 5:17 am
Is the fact that the new Pension Reform Legislation went into effect this week completely lost on you, rrelph? We have investment officers and actuaries employed at CalPERS. I say that these are the people responsible to see that the right figures and expectations are put out. That’s what they are paid to do.
January 9, 2013 at 3:07 pm
SeeSaw, no it is not lost on me. But that so-called reform legislation will have almost no financial impact for decades. $12 to $15B in present value terms over the next 30 years. Small compared to the roughly $100B present value of the underfunding CalPERS currently has.
As for those omniscient CalPERS employees, is it they who are on the hook if they “guess wrong”? As has previously been observed by other in this thread, differences of 0.5% in estimated returns over decades adds up to “real money”. So when CalPERS lowered it’s estimated returns from 8.25%, to 7.75%, to 7.5%, who was hurt by the bad estimates of the past? The past bad “guessers” at CalPERS? No. The past employees who benefited from higher pay, or the past taxpayers who benefited from lower taxes? No. The current retirees? No.
The people who are hurt by bad guesses about the future are the taxpayers and residents of the future. That’s immoral. That’s wrong. That’s unjust.
As a result, we are having to pay higher taxes now, TODAY… not to get higher services, but merely to not suffer bigger cuts in government services than we are already experiencing. Where is the additional tax revenue going? To pay for the past mistakes of those CalPERS and CalSTRS experts you put so much faith – our children’s faith – in. Here’s an article from one of those experts, one actually on the CalSTRS board for a while:
http://www.bloomberg.com/news/print/2012-04-23/new-california-taxes-pay-for-pensions-not-schools.html
How close to the brick wall do you want to get before we start applying the brakes? When the deceleration is tolerable? At 1G? 2G? 3G? 10G?
You keep saying you don’t see the wall… but then, all you’re looking at is that piece of legal paper in your lap. Take off the rose-colored reading glasses and put on your night driving glasses. Look out the windshield. And see what more and more people with each passing day… it really is there, that brick wall. You and I may or may not be dead before we hit it, but your kids and mine, our grandkids as well, they will be stuck in the car. We owe it to them to make sure we do not hit the wall.
January 9, 2013 at 5:17 pm
I’ve never said returns are predictable… however the CalXXXX actuaries did not plan properly for a prolonged downturn like that from 2008 until now. There have been others at least as bad… 1929-1940’s comes to mind. Any pension system should be designed to survive 1929-1940’s without high taxpayer (really, any taxpayer) extra replenishment.
CalSTRS has a nice constant government/employer contribution rate. The benefits should have been kept inside that envelope, even taking into account the 2008 downturn. But benefits got raised too much… and BTW, CalSTRS benefits are not overly generous. CalPERS and UCRS are much more generous.
I don’t bite on the idea that life expectancy is increasing unpredictably. Take a look at http://www.ssa.gov/history/lifeexpect.html.
While medical technology is improving, people’s behavior is not. People are still overeating, not exercising, and eating unhealthy food. The war on cancer is pretty much stalled, although small incremental gains get made. The real story is that the medical industry profits on bad health behavior, driving up Medicare and insurance costs. Those are a different issue than pensions; medical insurance is not guaranteed in post-retirement benefits as strongly as pensions are.
As Seesaw has pointed out, medical costs do eat up pensions. Medical costs are a big problem, and frankly, Obamacare tried fairly hard to reduce costs. But it is really hard to beat all the medical industry lobbyists… shocking how the Republicans simultaneously howled about how unfair the $700 billion Obamacare cut from Medicare was, while simultaneously saying they’d cut even more with the Ryan budget.
But the Republicans have no lock on doublethink. The Dems also do what the medical lobby wants, much of the time. A big medical mess.
January 10, 2013 at 8:04 pm
Kind of shocking report… the US has the lowest life expectancies among developed countries for all ages below 50…
By age 70, we rise a notch or two out of the basement.
So I don’t agree at all that increasing life expectancy is much of an issue… decreasing life expectancy is a bigger issue. BTW, between 1940 and 1990, life expectancy for 65 year-olds increased only 2.6 years for men, and 4.9 years for women. Hard to believe that is a big effect.
A much bigger effect is that we pay the most of any developed nation for health care, and get the worst outcomes (in terms of life expectancy, certainly, for all under 50).
January 12, 2013 at 6:17 am
Spensions says: BTW, CalSTRS benefits are not overly generous. CalPERS and UCRS are much more generous.
Not sure about UCRS but the CalSTRS may be more generous than you think. For instance, CalSTRS employees had their pension contribution reduced from 8% to 6% for a decade (2001-2011). Their pension increases from 2% at 60, to 2.4% at 63 regardless of the years of service. They also receive a 400 dollar per month CalSTRS longevity bonus if they’ve worked 25 years (on top of the longevity bonus teachers contracts already provide (a compounded bonus if you will). Not sure where others are from but in my district we have a PE Teacher making 119K per year.
That’s a pretty good payout even if it isn’t the equivalent of 3@50. And the list of the CalSTRS $100,000 pension club continues to grow while the cost to fund their pension is about to explode.
January 12, 2013 at 7:09 am
And I might add that if CalSTRS were receiving adequate pension funding over the past several years the CA educational system wouldn’t of had the money to continue inflating salaries and crazy benefits for teachers and Administrators. While I’m not opposed to teachers earning a good living I am opposed to throwing more money in their direction without educational reform. And while some people will claim I must hate teachers that couldn’t be further from the truth – although I don’t think much of the Teachers Union.
It seems to me that challenging the teachers/teachers union is today what challenging the the Fire Department/FD union was was post 9/11 up until to the beginning of the recession/contract awareness.
Those statements may not be politically correct enough for some, regarding the teachers and their union, but I’m trying to not be politically correct. I’ve looked at several school district contracts and I just don’t like some of the language I see. The “It’s All About The Kids” slogan seems to have more to do with marketing (contracts, Parcel taxes, School Bonds) than the kids.
– the end of my rant –
January 12, 2013 at 9:11 pm
Captain… see http://www.fixpensionsfirst.com/docs/Full_Report.pdf , chart 6A-6D on pages 23-25. CalSTRS benefits are much smaller
That report was not made by a pro-public employee organization.
Anecdotes and rants don’t compare with the sober hard facts. Teachers don’t get outsized retirement benefits compared even to the private sector.