Inflation could quickly erode CalPERS pensions

Inflation could quickly erode CalPERS pensions

CalPERS retirees could be in for a surprise. The California Public Employment Retirement System payments include a 2 percent inflation increase every year, called a Cost of Living Adjustment. In recent years, the federal government’s Consumer Price Index, which tracks inflation, has been rising less than 2 percent a year.

Whip inflation now

That means the CPI has been less than the COLA. So far so good.

But what if inflation is higher? It’s unlikely that 1970s-style double-digit inflation could return. But even an increase in inflation to 4 percent a year, for example, could rapidly erode pension values.

The possibility is real because Janet Yellen, currently the vice chairwoman of the Federal Reserve Board, long has advocated more inflation. She is a prime candidate to replace outgoing Ben Bernanke as the Fed chairwoman.

“Progress on reducing unemployment should take center stage … even if maintaining that progress might result in inflation slightly and temporarily exceeding 2 percent,” Yellen told a meeting sponsored by the Society of American Business Writers and Editors, as reported by Reuters.

However, similar “temporary” inflation policies were pursued by the Fed in the 1970s, but then things got out of hand and inflation rose much higher than expected.

CalPERS pensions could be cut in half in just 11 years

CalPERS’ set COLA of 2 percent a year is 1 percentage point less than the 3 percent historical inflation rate. A 1 percent per year erosion of pension payments over 20 years is a 20 percent reduction in benefits.  On a compounded basis, the reduction in pension payments would be even greater.

A looming increase in money inflation from the “tapering” of “quantitative easing” by the U.S. Federal Reserve, even if Yellen does not become chairwoman, is likely to result in CalPERS pensions eroding.

If inflation jumps to a compounded 9 percent, a CalPERS pension could be cut in half in as little as 11 years, as shown in the table below.  At a 9 percent inflation rate, pension benefits would erode by 74 percent over 20 years.

                                  Inflation Erodes Pension Benefits
Monetary Inflation Rate
Cost of Living Adjustment
Net Inflation
Monthly Pension in 20 years Adjusted for Net Inflation
Percent Erosion over 20 years
Years Needed to be Cut in Half

Inflation Averaged 8.75 Percent from 1973 to 1982

Inflation has averaged only 1.46 percent since the Mortgage Meltdown and Bank Crisis of 2008.  But inflation averaged 8.75 percent per year from 1973 to 1982.  The crisis led to President Gerald Ford’s Whip Inflation Now campaign, where he passed out “WIN” buttons. But it didn’t work. Only the tight money policies of Federal Reserve Board Chairman Paul Volcker finally crushed inflation in the early 1980s.

That is, Volcker applied the opposite policy to what the Federal Reserve Board currently is using, and which could accelerate if Yellen becomes its chairwoman.

Inflation is a double-edge sword. Fiscal conservatives have historically opposed inflation as a policy because they see it as a hidden tax. But high inflation may be the only way to bring California’s public pension system into line with reality.

If that happens, even as pension payouts increase in monetary amounts, inflation stealthily would reduce the actual value of the dollars sent to the retirees’ bank accounts.

CalPERS’ retirees, as well as employees paying into the system, then would have to lobby the Legislature for increased payouts. But if inflation occurs, it also would be squeezing other state budget items.


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  1. Rex the Wonderdog!
    Rex the Wonderdog! 13 August, 2013, 16:35

    Well, I hope the entire pension fund collapses.

    Reply this comment
  2. Ted Steele, Prosecutor
    Ted Steele, Prosecutor 13 August, 2013, 21:10

    LOL— WHAT on earth was the point of this piece? Yes inflation may come, undoubtedly, and it will hurt most people. So.

    The Poodle chimes in with his usual non relevant comment and the usual suspects chime in– nothing. Zzzzzzzzzzzzzzzzzz nite nite…..

    Reply this comment
  3. S Moderation Douglas
    S Moderation Douglas 14 August, 2013, 07:31

    CalPERS retirees have already got their big surprise, and most of them don’t realize it yet.

    A state worker retiring in 2013 at full retirement age will lose more in real pension dollars due to CPI increases since 2000 than he would gain from the SB400 formulas.

    Reply this comment
  4. Queeg
    Queeg 14 August, 2013, 07:33

    Lets act professional on this tony new site format….If CalPers fails all you CAVERS will pay taxes to shore up hard earned pensions of faithful and productive civil servants!

    Reply this comment
  5. stolson
    stolson 14 August, 2013, 08:59

    re–….If CalPers fails all you CAVERS will pay taxes to shore up hard earned pensions of faithful and productive civil servants!
    That is not a fact. The times they are a changing.

    Reply this comment
  6. El Kabong
    El Kabong 14 August, 2013, 11:10

    Wayne seems to miss the impact that twenty years of 9% inflation would have on every savings account and the larger economy. That’s why there would be Volcker like policies used to squeeze the inflation out of the economy.

    In the meantime, Wayne has also missed the wonderful CalPers Purchasing Power Protection Allowance (PPPA) that accompanies COLA payments. However high inflation might go, a retired member is guaranteed no less than 80% of the same purchasing power they had when they retired from service.

    Reply this comment
  7. El Kabong
    El Kabong 14 August, 2013, 11:12

    What are you talking about, S Moderation D?

    Reply this comment
  8. Sean Morham
    Sean Morham 14 August, 2013, 11:20

    Not from Texas.

    Reply this comment
  9. Ted Steele, Prosecutor
    Ted Steele, Prosecutor 14 August, 2013, 17:09

    LOL— “if Calpers fails…” they will first have to burn through the growing 268 billion in the fund first! At almost a .09% burn delta per year minus fund improvement this will take a long time (understatement) — most of your grandchildren will be unaware of this very important blog by then………..oh my….

    Reply this comment
  10. Queeg
    Queeg 14 August, 2013, 21:26

    You will pay….your ruled not governed due to bad policies, running laughable candidates and needy needy voters desperately in need of a safety net.

    Reply this comment

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Tags assigned to this article:
Janet YellenCalPERSPaul VolckerWayne Lusvardi

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