This week both of California’s largest government employee pension funds, CalPERS and CalSTRS, released their portfolio earnings numbers for the most recent twelve months. In a statement released on January 24th, “CalSTRS Calendar Year-End Investment Returns Show Slight Gains,” CalSTRS disclosed “Investment returns for the California State Teachers’ Retirement System (CalSTRS) ended the 2011 calendar year posting a 2.3 percent gain.” CalPER’s statement released on January 23rd, was titled “[CalPERS} Pension Fund earns 1.1 percent return for 2011 calendar year.”

These funds, and the rest of California’s many local government employee pension funds, are still clinging to long-term rate of return assumptions of between 7.5% and 7.75% per year. So how much would taxpayers be on the hook for if rates of return stay this low?

The first step towards determining this would be to estimate the average pension paid out to a state or local worker in California, based on recent retirees who have worked a full 30 year career. Despite the claim that “The average CalPERS pension is $2,220 per month” (made yet again in the final paragraph of their above-referenced press release), for a more accurate figure, one must look at the average pension awarded recent retirees, based on a full 30+ year career. The problem with the low figure used by CalPERS and others is that it includes people who retired decades ago when salaries and pension benefit formulas were much lower, and it includes people who may have only worked a few years for the government. Since we will be multiplying this average pension by the number of full time state and local government workers in California, we have to assume a full career when calculating the average pension, since for every worker who only worked 10 years, for example, two additional retirees will also be in the system who have themselves also only worked 10 years. To calculate the cost of a full-career pension, you have to add all three of these part-career retirees together. Here is what these pensions really average, based on CalPERS Annual Report FYE 6-30-11 (page 153), and CalSTRS Annual Report FYE 6-30-11, (page 149):

CalPERS average final salary for 30 years work, retiring 2010: $82,884
CalPERS average pension for 30 years work, retiring 2010: $60,894  –
Pension equals 73% of final salary (average of 25-30 year and 30+ year stats)

CalSTRS average final salary for 30 years work, retiring 2010: $88,164
CalSTRS average pension for 30 years work, retiring 2010: $59,580  –
Pension equals 68% of final salary (average of 25-30 year and 30-35 year stats)

If one extrapolates the CalPERS and CalSTRS data to the many independent pension funds serving local agencies – many of these are quite large, such as the one for Los Angeles County employees – it is probably conservative to peg the average pension going forward for full-career government workers in California at at least $60,000 per year, and at least 70% of final salary.

The next step in figuring out how much state and local government worker pensions could cost California’s taxpayers in the future is to establish the sensitivity of pension contribution rates to changes in the rate of return of pension funds. UnionWatch has explored this question repeatedly, with a good summary in the July 2011 post entitled “What Payroll Contribution Will Keep Pensions Solvent?” Using the same financial assumptions as were used in that analysis, here is how the required pension contribution rates – expressed as a percent of payroll – change in response to lower earning rates for the pension funds. This is based on pensions averaging 70% of final salary, and assumes 30 years working, 25 years retired, and salary (in real dollars) eventually doubling between hire date and retirement date:

If the pension fund’s return is 7.75%, the contribution rate is 22% of payroll.
If the pension fund’s return is 6.75%, the contribution rate is 28% of payroll.
If the pension fund’s return is 5.75%, the contribution rate is 37% of payroll.
If the pension fund’s return is 4.75%, the contribution rate is 48% of payroll.
If the pension fund’s return is 3.75%, the contribution rate is 63% of payroll.

What the above figures quickly indicate is not only that the required payroll contributions go up sharply when projected rates of investment return come down, but that the lower the rate of return goes, the more sharply the required contribution rises.

To complete this analysis, one only needs to multiply the number of full time state and local government employees in California by the average payroll for these employees, and multiply that result by the various required contribution rates. Using 2010 U.S. Census data for California’s State Employees and for California’s Local Government Employees, one can quickly determine that there are 339,430 state workers earning on average $68,880 in base annual salary, and there are 1,185,935 local government workers earning on average $69,399 in base annual salary.

To sum this up, there are currently 1,525,365 full time (not “full-time equivalent,” which would be an even higher number, but those part-time employees may or may not have pension benefits) state and local government employees in California. They earn, on average, $69,284 per year in base pay. Here is how much pensions will cost for these workers each year based on various rates of return:

If the pension fund’s return is 7.75%, the state pays $23 billion to pension funds each year.
If the pension fund’s return is 6.75%, the state pays $29 billion to pension funds each year.
If the pension fund’s return is 5.75%, the state pays $39 billion to pension funds each year.
If the pension fund’s return is 4.75%, the state pays $51 billion to pension funds each year.
If the pension fund’s return is 3.75%, the state pays $66 billion to pension funds each year.

It is interesting to note that both CalPERS and CalSTRS failed to even achieve a 3.75% return in calendar year 2011, the lowest amount used in these examples and the lowest amount that can even keep pace with inflation.

When one takes into account the fact that only about five million households in California pay net taxes, the impact of the pension con job Wall Street brokerages have enlisted the support of public sector unions to foist onto taxpayers is even more dramatic. Because if, during the great deleveraging that likely will consume this economy for at least another decade, California’s pension funds only deliver 3.75% per year, instead of 7.75% per year, that will translate into $8,600 per year in new taxes for each and every taxpaying California household.

15 Responses to How Much Could California’s Government Pensions Cost Taxpayers?

  1. Tough Love says:

    I didn’t verify ALL the details, but pretty much accurate and on target.

    The takeaway …. Taxpayers won’t pay and pensioners should expect a 50-75% pension haircut.

    • Jon O'Connor says:

      If you did not verify the numbers – and I doubt that you know how – then how did you know that they are accurate and on target – must be related to the editor – in ignorance.

      You people are playing with other people’s lives when you propose devastating cuts to their livelihood based on bias, ignorance and above all ENVY. reforming or even eliminating the pension system will not improve your lives, nor will it contribute to economic development or job creation. It will only maintain the welfare state that California has become. It is always a threat between cutting the pension or social programs that benefit some poor but mostly parasites who take advantage of the system.

      • Tough Love says:

        Jon, Interesting reply . Clearly you are a Civil Servant riding this gravy train and do not want it derailed. As to my knowledge, how would you know? But FYI, I’m quite knowledgeable in pension Plan design and funding.

        You say things like …”you propose devastating cuts to their livelihood based on bias, ignorance … “. Your MUCH greater pension may have been justified 20+ years ago when Public Sector cash pay was lower, but today, with (per the US Gov’t BLS) cash pay no less than your private sector counterparts, greater pensions and better benefits (at taxpayer expanse) are not justified.

        Devastating to livelihoods ?

        How about the livelihoods of the taxpayers who get SO SO SO much less than you, but via their taxes are called upon to pay for YOUR excessive pension ?

        Sorry buddy. The Taxpayers have wised up. A wise man in your position would plan on getting a lot less than has been “promised”.

      • Joe Green says:

        Spoken like a true public employee parasite

  2. Rich K says:

    Frankly I would just move from the state if at all possible and let the warfare between calpers/calstrs and sacramento consume itself.

  3. Jon O'Connor says:

    The writer is either ignorant about math, does not understand how the pension system works, or is a hypocrite who intentionally distorts number and as such should not be writing editorials. Now I understand why most editorials do not show the name of the writers – perhaps because most are ashamed of what they write.
    The assumption that if the rate drops to 3.75% would cost the tax-payers $66 billion is not only outrageous but a flat out lie. To owe $66 billion in one year it means that all state employees would retire in one year and all would place a demand on the pension system to equal the $66 billion – highly illogical, improbable and ridiculous. The sad thing is that most of the ignorant public would buy such lies. If we really needed to fix the pension system some dignity, honor, logic and understanding of the system are necessary or to each his own.

    • Tough Love says:

      Jon, I’m pretty sure I know which author penned this, and he’s quite knowledgeable.

      You are rightly concerned over this mess the Politicians in cahoots with your Union have created (you know …. campaign contributions and election support in exchange for favorable votes on pay, pensions, and benefits).

      It’s never a good thing to make promises with someone ELSE’S checkbook (the Taxpayers), as those with the checkbook won’t likely pony up to pay this bill.

      Sorry buddy. The Taxpayers have wised up. A wise man in your position would plan on getting a lot less than has been "promised".

  4. Free2Smooze says:

    Did the lefty union apologist just complain about class envy? Welcome to the Republican Party, Jon.

  5. Editor says:

    Jon – thank you for your comments. Here is a restatement of our calculation that annual contributions to California’s state and local employee pension funds would be $66 billion per year IF the long-term pension fund rate of return projections were lowered to 3.75% per year:

    First of all, take a good look at the spreadsheet at the close of our July 2011 editorial – this shows quite clearly the numerical logic that underlies our assertion that an employee who works 30 years and is retired for 25 years with a pension equivalent to 70% of their final salary would have to contribute 63% of their payroll every year into that pension fund – if the pension fund’s long-term rate of return is reduced to 3.75%:

    You are invited to challenge any of the assumptions that underlie that spreadsheet’s calculations. They are all conservative, that is, they all combine to understate how much of a payroll contribution would be necessary.

    It is relatively simple to apprehend the remaining calculations. Simply take the annual payroll for all of California’s full-time state and local government employees, and multiply that amount by 63%. All the links to the raw data are provided – how many state and local government employees we’ve got in California, and how much they make, is well documented and beyond serious debate. Also well documented is the fact that the average recent state or local government retiree in California, if they’ve worked a full career, gets a pension equivalent to at least 70% of their final salary. If you have any doubts about how we arrived at any of these numbers, or the source data, please be specific and we’ll respond.

    If these pension funds do not hit their earnings targets, either the benefits will be cut or taxpayers will face massive tax increases. For every 1.0% that their projected rate of return drops, about $10 billion (or more) per year in additional tax revenue will need to be given to the pension funds. This is, frankly, irrefutable.

    The question that does remain open to serious debate is the rate of return assumption that should be used. And in their own words, pension fund spokespersons are now saying that “the forces that used to work for us are now working against us.” What they are referring to are several factors, but primarily the fact that we are no longer in a position to accumulate consumer, commercial and government debt. When people were borrowing money against their home equity, for example, they spent much more on consumer products and durable goods than they do today. This spending elevated stock prices and translated into high returns for the pension fund investments. Those days are over, as I’m sure you know.

    Other factors that are working against high returns for the pension funds are even more seismic. The most significant of these is the overall aging of the American population, which means higher proportions of people are going to be trying to fund their retirements by living off sales of investment assets, and relatively fewer people will be saving for retirement by purchasing investment assets. This means the demand for investment assets is going to fall, the supply of investment assets is going to increase, and the price of investment assets will fall – or appreciate at a slower rate than before. This demographic reality is going to hit pension funds like a tsunami (to use an overused metaphor). And because pension funds currently pay out to a retired population that is predominantly still comprised of people who retired before base final salaries and pension benefit formulas went through the roof (that only happened about ten years ago), these pension funds are still buying a lot more investment assets than they’re selling. Currently they are taking in, i.e., investing, about three times what they are paying out, i.e., distributing in the form of pension payments to retirees.

    Not all of us are anti-government extreme libertarians. Nor do all of us think the defined benefit should be completely eliminated. But today’s upgraded pension benefits for California’s state and local employees are not only obscenely out of line with what private sector workers can ever expect from social security, but they are financially unaffordable, to put it mildly.

  6. Gregg says:

    You want to wrestle with a guy with a crap smeared all over himself? Or get piss thrown at you? Do you want to get in a knock down dragged out fight with a guy who outweighs you by 40 pounds and is a convicted murderer? I have been spat upon, cursed at, punched and kicked many many times. I have attended co-workers funerals who have died in the line of duty. I have done this for the past 26 years. You say I’m riding a gravy train? I do what you can’t or wont do. You want to find someone else to do my job without any pension benefits? Be my guest and good luck.

  7. Scott Baker says:

    I am writing a book on Economic Reform, based on my previous articles, part of the 200+ found here:, and a major section has to do with the pension funds.
    How much they actually pay out vs. what they hold is the major question.
    I think using the per capita payout figures is irrelevant to the issue of long-term sustainability, and this article misleads anyway.
    What I really need to know is: What percent of the $477B (Calpers + Calstrs) fund goes to pensioners each year? I believe it is 4%, but my figure may be dated. 4% is sustainable. 8% would not be, based on the 7.3% ROI (Calpers) and 7.7% ROI (Calstrs) over 10 years.
    Don’t overthink this. It is not that complicated.
    Please respond ASAP, as I have a publisher deadline in early December.

  8. Ed Ring says:

    If you are intending to publish a book on economic reform with a chapter on pensions, you should know that your question is easily answered. In CalPERS FYE 6-30-2013 financials you will see they had assets of $281 billion and total expenses (mostly pension payouts) of $17.3 billion. This outflow represents 6.2% of their assets. Refer to pages 40 and 42, here:

    But you are making a huge assumption when you compare a sustainable payout as a percent of assets for a retired individual with a sustainable payout to a collection of participants including people still working. The pension benefit formulas for current workers in CalPERS still greatly exceeds the formulas applicable to retirees, on average, because pension benefits were only enhanced starting around 2000, and those enhancements didn’t stop rolling through the CalPERS system until nearly ten years later.

    • Scott Baker says:

      Thank you for your quick reply, and yes I am writing a book, so this is very helpful.
      Note: Only $5.3 billion was paid out to pensioners and expenses, NET of employee/employer contributions, which totaled $12,019,911 for FY 2013. This is only 2.03%, not 6.2%. It makes you wonder, as I do in the book, whether it is worth having a pension fund at all, with its nearly half billion dollar management fee, or whether it would just be better to simply tax the remainder from the general population and offset that with a gradual return and debt ELIMINATION via eventual liquidation of the pension fund. After all, is California, or any government, in the business of providing support to Wall Street, or to Californians?
      There might also be much better investments for that money, as I propose in the book, like a Public Bank, that would create jobs, keep the money in the state, and be a counter-cyclical investment, like the Bank of North Dakota.

      • Scott Baker says:

        I should have made clear that by “return” I meant a citizen’s dividend, which would easily exceed the extra amount in taxes, and could be revenue neutral is most of the Administrative Fee was eliminated by choosing more conservative and less “brainy” investment strategies as the fund wound down or was put into a Public Bank etc.
        Of course, a PB is staffed by Civil Servants, so the cost is much lower. The president of the State Bank of North Dakota, for example, makes about $300k/year.

  9. RealAmericanMan says:

    The tax payers should not pay any amount toward other peoples pensions. Are you people crazy! Why should I pay for someone else’s retirement. If your a public worker, save your own money for retirement. This is absurd! Do you know how much money you would have to save and invest to receive $5000 dollars a month. About $1,000,000. I doubt that a public servant could save that amount in a lifetime. This is a California travesty! Don’t move! Fight for this great state. Let’s get rid of all the Liberals and bring in the innovators an independent thinkers! The people that make a difference and create jobs. Not government parasites!

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