Underfunded California pensions stoke calls for benefit cuts
28 July 2012
The economic implosion that began in 2007 is having an effect on pension funds across the United States. In California, the problem is compounded by the thousands of sackings of government workers and education and university employees, along with the bankruptcy and near-bankruptcy of cities across the state.
The California Public Employees’ Retirement System (CalPERS) posted a 1 percent return on its investments for the fiscal year that ended June 30. The smaller California State Teachers’ Retirement System (CalSTRS) reported a 1.8 percent annual return. This is a far cry from the long-term returns of 7.75 percent and 7.5 percent that the funds planned for.
Both pension funds combined cover 3.1 million active and inactive members, including around 750,000 retirees. A smaller system, the University of California Retirement System (UCRS), covers 117,000 employees of the University of California. It has 25,000 inactive members and 30,000 retirees.
All three investment funds have voiced their concern that a deepening of the current economic crisis would result in pension fund levels below 40 percent of longterm liabilities. Rescuing the funds from that level would take a combination of draconian cuts in benefits and very large increases in contributions from state agencies, school systems, and workers.
In response, 5 years ago, CalPERS, the nation’s largest public employee retirement fund—with current assets of $237 billion, down from $260 billion in 2006—began trading in the commodities market, a highly speculative area. Predictably, the result was disastrous, with average losses of 6.9 percent per year.
In CalPERS’ case, actual returns have fallen dramatically to an annual 4.4 percent. This gap is made up by forcing workers and government agencies to pay more into the fund. For CalSTRS, returns that averaged 8.5 percent annually in the 1990s have now dropped to an annual average of 6.5 percent since.
The UCRS fund raised employee contributions to 5 percent of gross pay, up from 3.5 percent. University contributions were increased to 10 percent, up from 8 percent. Next year, employee contributions will again rise to 6.5 percent, and 12 percent for the universities.
The poor performance by these funds is in part linked to their investments in Europe. It is also a sign that the world economy’s slide downward is accelerating, and that financial markets are either flat or falling.
The result is sure to buttress those sections of big business that are calling for a major downsizing in public employee pensions, shifting the risk away from states and cities and onto the workers themselves. This is akin to what has happened in the private sector, denying public employees the right to a secure, decent retirement.
Since the 1980s, in the private sector, defined benefit pensions—when retired workers are assured a monthly amount independently on stock market conditions—have been replaced by defined contribution plans, in which the retiree’s future benefit, in the form of a lump-sum, or an annuity in the hands of an insurance company, is a function of the ups and downs of financial markets.
Democratic Party California Governor Jerry Brown has proposed a 12 point “hybrid” plan—half defined contribution, half defined benefit. This is part of a bipartisan assault on pensions.
Brown’s plan also includes increasing the retirement age for most workers to 67, imposing the mandatory use of three- year average salaries to determine retirement payments, the limitation of that salary to an employee’s base rate of pay, a prohibition on benefit payments to convicted felons, and the elimination of service credit purchases that allow workers to purchase extra years of service.
The United States’ national pension system, the Social Security trust fund, deposits worker contributions in the US Treasury, which is ultimately responsible for the benefits to retired workers.
California and other states, on the other hand, invest workers and employer’s contributions in global financial markets—stock markets, bond markets, mortgage markets and commodity markets. CalPERS and CalSTRS feed global capital flows, part of a gigantic financial operation that is lucrative source of income for fund managers, insurance companies, and union officials—for whom having to guarantee future payments to workers is a cost that they are determined to minimize.
In California, the financial crisis of the pension funds has been augmented by the sacking of thousands of public employees, the slashing of social programs, and cuts to education estimated at $20 billon. This is making it increasingly difficult for public pension funds to increase their revenue base. Added to this are declining tax revenues to the state. The four California cities that are in bankruptcy have also sought to significantly reduce their share of contributions to pension funds.
The state legislature will not rescue the pension funds unless they are tied to major cuts in benefits and the replacement of the current defined benefit system—which covers 85 percent of the public employees—with the much more risky [to the workers] defined contribution plan.
For over two decades workers across the state have been forced to increase their contributions by public employee unions that purport to represent them. The “2 percent at age 55” retirement formula (2 percent of the highest salary times the number of years worked) of twenty five years ago has been transformed into “1.25 percent at 60.”
Union officials typically, and cynically, represent pay cuts and pension cuts agreed to by the unions as preferable to government imposed cuts.
While Governor Brown, a Democrat, is more willing to work with unions, he, like his Republican predecessor Arnold Schwarzenegger, favors a full-scale attack on retirement benefits across the state, and on the right of every Californian to have a decent retirement that includes high quality medical care.