“The state shall not have any liability for the payment of the retirement savings benefit earned by program participants pursuant to this title.” – California State Senator Kevin De Leon, August 7, 2016, Sacramento Bee

This quote from Senator De Leon, one of the main proponents of California’s new “Secure Choice” retirement program for private sector workers, says it all. Because De Leon’s comment reveals the breathtaking hypocrisy and stupefying innumeracy of California’s legislature.

Let’s start with hypocrisy.

De Leon is careful to protect private sector taxpayers from having to bail out their new state administered “secure choice” retirement plan, but no such safeguard has ever been seriously contemplated for the state administered pension plans for state and local government workers. These plans, using official numbers, are underfunded by about $250 billion. If you don’t assume California’s 92 state and local government worker pension systems can earn 7.5% per year, they are underfunded by much more – at least a half trillion.

Underfunded government worker pensions are the real reason why Prop. 55 is offered to voters to extend the “temporary” “millionaires tax” till 2030. That will raise about $6 billion per year. Underfunded local government worker pensions are also the reason for 224 local tax increases proposed on this November’s ballot, which if passed will collect another $3.0 billion per year. And it isn’t nearly enough.

The following table, excerpted from a recent California Policy Center study, shows how much California’s state and local government pensions systems have to collect per year based on various rates of return. At the time of the study, the most recent consolidated data available was for 2014. As can be seen – at a rate of return of 7.5% per year, state and local agencies have to put $38.1 billion into the pension funds. And at a rate of return of 6.5% per year, which CalPERS has already announced as their new “risk free” target rate, they have to turn over $52.3 billion per year. How much was actually paid in 2014? Only $30.1 billion.

20160516-cpc-ring-pension-liabilities

To summarize, in 2014 the pension funds collected $8.0 billion less than they needed if they think they can earn 7.5% per year. But following CalPERS lead, they’re lowering their projected rate of earnings to 6.5%, which means they were $22.2 billion short. There are 12.8 million households in California. That equates to at least $1,734 in additional taxes per household per year just to keep state and local pensions solvent.

And it gets worse. Because in order to ensure this new “Secure Choice” program doesn’t get into the same financial predicament that California’s government pension systems confront, the “risk free” rate of return they intend to project is not 7.5%, or 6.5%, or even 5.5%. No, they intend to initially invest the funds in Treasury Bills, which currently pay at most 2.5%. In an analysis of Secure Choice’s proposed costs and benefits performed last April, we express what using a truly “risk free” rate of return portends for California’s private sector workers vs. public sector workers. These estimates are based on all participants, public and private, contributing 10% to the fund via withholding.

Public sector:  Teachers/Bureaucrats, 30 years work  –  pension is 75% of final salary.

Public sector:  Public Safety, 30 years work – pension is 90% of final salary.

Private sector:  “Secure Choice,” 30 years work – pension is 27.6% of final salary.

There are two reasons for this gigantic disparity. First, public pension funds collect far more than 10% of salary. While the employee rarely pays more than 10% via withholding, the employer – that’s YOU, the taxpayer – typically kicks in another 20% to 40% or more, that is, a two-to-one up to a four-to-one employer matching contribution. Second, to justify the optimistic projections that make such generous pensions appear feasible, public pension funds have assumed a “risk free” rate of return of 7.5% per year.

Which brings us to innumeracy.

During the fiscal year ended 6/30/2015, CalPERS earned a whopping 2.4%. That stellar performance was followed in fiscal year ended 6/30/2016 by a return of 0.6%. It doesn’t take a Ph.D economist to know that California’s pension funds are going to need to greatly increase their annual collections. It only takes horse sense. But even horse sense eludes California’s innumerate lawmakers.

So here’s a modest proposal. Why not freeze the employer contributions into California’s state and local employee pension funds at 20% of salary (that’s a two-to-one match on a 10% contribution via withholding), and then, constrained by those fixed percentages, lower all benefits, for all participants, on a pro-rata basis to restore solvency. Better yet, why not enroll every state and local government employee in the Secure Choice program? Either way, “the state shall not have any liability for the payment of the retirement savings benefit earned by program participants.”

Along with this modest step towards dismantling the excessive privileges of these unionized Nomenklatura who masquerade as California’s public “servants,” why not enroll all state and local government employees in Social Security? Because California’s public servants make far more, on average, than private sector workers, and because Social Security benefits are calibrated to pay relatively less to high income participants, this step will financially stabilize the program.

Senator De Leon, are you listening? When it comes to state administered programs, all of California’s workers, public and private, should get the same deal.

 *   *   *

Ed Ring is the president of the California Policy Center.

12 Responses to Put Public Employees on Secure Choice and Social Security

  1. Tough Love says:

    Ed,

    Great article, and we’re of the same mind. But given CA’s Union-BOUGHT Legislature, it’s VERY unlikely much will change UNTIL a mid-to-large City goes Bankrupt, rejects it’s DB pensions, and pokes it’s finger in CalPERS eye …. reminding CalPERS that it’s just(as the Judge stated) a “bully” with no power under the Bankruptcy process.

    • talltalk says:

      as usual, tough love changes the subject. such a manipulator….

      • Tough Love says:

        My comment was certainly on point. “Change” won’t take place in the highly politics-driven arena of Public Sector pensions & benefits (with our Union-BOUGHT Elected Officials) UNTIL a crisis hits and the WORKERS/RETIREES see that THEY may be next.

        • talltalk says:

          you may find a twisted route from the article to your comments, but critical thinkers don’t.

          • Tough Love says:

            talltalk,

            Critical readers see that you have an anger-management problem with virtually anything/everything I post …. which is rather curious because we BOTH support material Public Sector pension reform.

  2. TB says:

    More and more people are beginning to realize that Defined Benefit plans like public pensions are not sustainable, including the private sector which has more or less done away with them. Here is my solution to this looming crisis that is only going to get worse without any correction of course:

    https://drive.google.com/file/d/0B90sU3A85q46OE9BZHJFSWEzbGM/view?usp=drivesdk

    Please help spread the word…

  3. S Moderation Douglas says:

    EdRing…

    “During the fiscal year ended 6/30/2015, CalPERS earned a whopping 2.4%. That stellar performance was followed in fiscal year ended 6/30/2016 by a return of 0.6%.” *

    Why stop with 2015 ?

    Jan. 2015, Los Angeles Times

    “The report released Tuesday by the California Public Employees’ Retirement System showed an overall 18.4% return on investments for the year that ended June 30 (2014). That’s compared with a 10.4 percent average annual return for the last three years.”

    EdRing, 2012

    “And because risk in a defined benefit fund is shared across generations of workers, during eras when investment returns are low, existing workers guarantee extra cash coming into the plan to keep it solvent, and during eras when investment returns are high, surpluses are fed into the pension fund that can also be used to make up the shortfall during lean years.”

    *(That’s a whopping example of stellar sarchasm.)
    Or vice versa.

  4. S Moderation Dougla says:

    “Senator De Leon, are you listening? When it comes to state administered programs, all of California’s workers, public and private, should get the same deal.”

    De chacun selon ses facultés, à chacun selon ses besoins.

  5. Tough Love says:

    SMD, Your quoted returns are returns on “assets”. CalPERS is now 1/3 underfunded, meaning 1/3 of the Plan’s liabilities are supported by ZERO assets.

    Another way of looking at this is that CalPERS must earn 7.5%/(2/3) = 11.25% on it’s ASSETS simply to not lose ground.

    What are the odds of anything even remotely near that (on average) year-after-year ?

    Yeah, CalPERS is dead…… just not clear how soon.

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