Despite Gain, CalPERS Still Underfunded

JULY 22, 2100

By LANNY EBENSTEIN

The recent announcement that the investment return of CalPERS for the 2010-11 fiscal year was 20.7 percent does not indicate that it, or other public sector pension funds, are now financially solvent. Indeed, the exact opposite is the case. Notwithstanding the increase in the stock market in the past year, CalPERS and other public sector pension funds are essentially insolvent. Their continued expected rates of return are in the vicinity of 8 percent (CalPERS projects a 7.75 percent return on investment annually). This is unlikely to occur.

Strictly from the standpoint of the stock market, the Dow Jones Industrial Average would have to be at approximately 25,000 in 2020 in order for future CalPERS projections to be accurate. That would be a doubling of the stock market in the next nine years. And it would have to be at about 50,000 by 2030, a quadrupling in less than twenty years.

Perhaps the most concerning aspect of CalPERS is that the value of its assets is merely $238 billion. That may sound like a lot, but compared to the approximately 1.1 million active and inactive members and 500,000 retirees and beneficiaries in the system, this amount is inadequate.

Payouts Increasing 

Currently, CalPERS pays about $12 billion per year in retirement benefits. But this figure is increasing substantially on an annual basis for many reasons. First, the number of CalPERS retirees each year is increasing. In 2000-01, CalPERS had 19,289 new retirees. In 2009-10 (the most recent year for which data are available), this had increased to 30,119, 56 percent more.

Second, existing CalPERS retirees receive cost-of-living adjustments every year. Third, the pensions of new CalPERS retirees are significantly higher than the pensions of past retirees since salaries have increased. Fourth, retirees are living longer than ever. Fifth, fewer current employees are paying into CalPERS as a result of cuts in state and local government personnel.

For all of these and other reasons, it is just a matter of time before the CalPERS fund comes up very short financially. A downturn in the stock market would be disastrous. On the basis of current retirements and the increase in average pension costs, it is likely that CalPERS will experience rising benefit expenditures of $1 billion to $1.5 billion annually for the foreseeable future. This means that, by 2020, annual CalPERS expenditures will be in the range of $25 billion. This will be an amount equivalent to close to one-third of the current California state budget.  And by 2030, annual CalPERS expenditures could increase to about $50 billion per year.

Rising Retirees

There is no way that current government employer and member contributions can cover these new expenditures without vastly increasing contributions. The number of CalPERS active members will stay roughly constant, or even decline slightly, while the number of retirees will, for the foreseeable future, rise by about 100,000 every three years.

Of the 1.1 million active and inactive members of CalPERS, approximately 800,000 are active and about 300,000 are not yet retired but no longer work for a government agency whose retirement program is managed by CalPERS.  In short, by 2020, there will be about as many — or even more — retirees than active members of CalPERS.

The additional $1 billion to $1.5 billion annually that CalPERS will experience in increased benefit expenditures for the foreseeable future translates into about $1,500 to $2,000 each year per current active member. That’s a $1,500 to $2,000 cumulative increase, meaning that in another 10 years or so, the average annual cost of pensions will be about $15,000 to $20,000 more per year per current active member than at present.

This is why the future rate of return on investment is so important. CalPERS already spends more each year than it receives from employers and members. If the rate of return does not equal 7.75 percent per year on average, then this additional $15,000 to $20,000 per year — or, rather, the underfunded portion of it — would have to be covered by increased employer or active member contributions.

In short, it is more likely that the 23 percent increase in CalPERS assets this year is the calm before the storm than the harbinger of a new era of fiscal solvency for CalPERS and other public pension funds.

Lanny Ebenstein is the president of the California Center for Public Policy

 

 

11 comments

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  1. Bravoman
    Bravoman 23 July, 2011, 07:04

    “Strictly from the standpoint of the stock market, the Dow Jones Industrial Average would have to be at approximately 25,000 in 2020 in order for future CalPERS projections to be accurate.”

    This statement above assumes that CalPers will not invest in any new stocks in the future. Just another one sided article by those who dislike Public Pensions……it is getting old!

    Reply this comment
  2. Rex ther Wonder Dog!
    Rex ther Wonder Dog! 26 July, 2011, 11:18

    First, the number of CalPERS retirees each year is increasing. In 2000-01, CalPERS had 19,289 new retirees. In 2009-10 (the most recent year for which data are available), this had increased to 30,119, 56 percent more.Second, existing CalPERS retirees receive cost-of-living adjustments every year. Third, the pensions of new CalPERS retirees are significantly higher than the pensions of past retirees since salaries have increased. Fourth, retirees are living longer than ever. Fifth, fewer current employees are paying into CalPERS as a result of cuts in state and local government personnel.

    ==============
    Don’t bother the trough feeding piglets with the facts.

    Reply this comment
  3. averageworkingdude
    averageworkingdude 26 July, 2011, 14:28

    One reason of an inflated increase in CalPERS people retirering in 2009-10 is they are afraid if don’t go now the coming take aways will reduce there pentions they have to get out early or lose. This is my situation. To Rex the wonder dog, piglet? I worked hard for a long time for my average pension prick.

    Reply this comment
  4. SeeSaw
    SeeSaw 26 July, 2011, 21:21

    Not all CalPERS retirees receive cost-of-living adjustments, every year. The COLA is figured on a complicated formula connected to the CPI. Every retiree group, according to the length of retirement, has a separate calculation. My COLA is 2% or less–the last two years have been less. Also, the groups that should have received their first CalPERS COLAs, the past two years, have not received anything.

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  5. SeeSaw
    SeeSaw 26 July, 2011, 21:24

    Mr. Ebenstein is going to find out soon that the majority of CA voters are not Libertarians, and we are not going to let him, or his ilk, fool with our pensions.

    Reply this comment
  6. Rex ther Wonder Dog!
    Rex ther Wonder Dog! 27 July, 2011, 00:04

    To Rex the wonder dog, piglet? I worked hard for a long time for my average pension prick.

    ================
    You’re a trough feeding piglet averagetroughfeedingngdude, you didn’t even cover 5% of your pension, you and the other piglets don’t work hard either.
    🙂

    Reply this comment
  7. Rex ther Wonder Dog!
    Rex ther Wonder Dog! 27 July, 2011, 00:05

    Mr. Ebenstein is going to find out soon that the majority of CA voters are not Libertarians, and we are not going to let him, or his ilk, fool with our pensions.

    ==================
    seesaw, wake up, you’re dreaming again 😉

    Reply this comment
  8. whinenomore
    whinenomore 27 July, 2011, 05:16

    I cracks me up when I read statements like:
    “Strictly from the standpoint of the stock market, the Dow Jones Industrial Average would have to be at approximately 25,000 in 2020 in order for future CalPERS projections to be accurate. That would be a doubling of the stock market in the next nine years. And it would have to be at about 50,000 by 2030, a quadrupling in less than twenty years.”

    No, that’s not really what this means. You’re ignoring the fact that many companies issue dividends so the effective yield is a combination of market price gains and dividend payments. So the DOW might not reach 25,000 by 2020 but could easily beat the 7.75% assumption.

    Reply this comment
  9. CA taxpayer
    CA taxpayer 20 June, 2012, 10:00

    what you goverment ” workers” fail to understand is that your pension fund was stolen years ago and we ( the taxpayers) are NOT going to pay for you TAXEATERS to suck up 150k a year in pension bennies….

    make no mistake taxPAYERS the taxEATERS are gonna dip into your wallets to support their ridiculous lifestyles…

    Reply this comment
  10. Know it all
    Know it all 13 July, 2012, 22:58

    Remember, Teachers in Cal pers do NOT get Social Security unless they worked in the public sector. So as industrial workers paid in to SS and expect to get theirs when they retire, so teachers expect to get the equivalent which is their pension. Regarding the amount, some get alot, and some don’t….it all depends on how long they worked and how much they made.

    Lastly, teachers should be yelling at their union reps…..Pensions are not suppposed to be a pay as you go and instead of arguing for 2% raises, the union reps should have been arguing for 100 percent funding over th past many years…..no popular becuase there was no immediate benefit for the members.

    Those are my thoughts

    Reply this comment
  11. KLynn
    KLynn 9 February, 2017, 12:05

    Too many believe that those who work for the government are “TaxEaters” as one previously indicated. I chose public service with an average salary because it was the right thing to do. I have enjoyed a varied and challenging career filled with many unpaid overtime hours just like I would have in the private sector. I was courted by the private sector on several occasions but chose the path I followed for stability reasons and the work was interesting and fulfilling.

    For years now, I have paid into my own CalPERS retirement (and I do not have any problem). My retirement will, in no way, be gold plated–very modest. I’ll be paying for my own health care too.

    To upend the system on the pretense that it is filled with money grubbing government employees is wrong. It would impact the economic stability of a great segment of our population who worked hard for their pensions (a component of their employment package) despite folks who would often malign us and everything about those of us who kept government working to pick up their trash, pave their roads, ensure that the homes they lived in were structurally sound and did a myriad of other things that folks take for granted. I’ve worked long and hard and paid into the system for many years. I passed on other high paying jobs that offered short term gain vs. long term stability. Government service is not right for everyone but most of the folks I’ve had the pleasure to work with are hard working tax payers just like the majority of society–not TaxEaters.

    Reply this comment

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