California pension system not in crisis

Andrew Harrer / Bloomberg

Bill Lockyer, treasurer of the state of California, speaks during an interview in New York, U.S., on Tuesday, Sept 28, 2010. California is lining up a short-term loan of more than $5 billion from a group of Wall Street banks to tide the state over with enough cash after a record-long budget impasse, Lockyer said this week. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Bill Lockyer

Despite those who are all-too-willing to play Chicken Little, the sky is not falling on the California pension system.

Here are the facts. Over the past 20 years, the California Public Employees' Retirement System has earned an average annual investment return of 8.4 percent, which is more than the fund needs to ensure it can pay long-term benefits. Since the market crash of 2008, CalPERS has recovered from its losses and is now funded at 75 percent, a healthy level by the mark of rating agencies.

A recent report on public pensions released by the Stanford Institute for Economic Policy Research flies in the face of these facts, favoring instead trumped-up assumptions that CalPERS earnings are much lower. For reasons unknown, or at least unsaid, the report asserts that CalPERS earnings stand at just 6.2 percent per year, a rate they suggest is breeding a growing shortfall in the fund.

That is not a fact, and SIEPR knows it. SIEPR knows that 6.2 percent isn't the actual earnings rate. Instead, that number reflects "the long-term historical average for investors allocating capital in the same manner as pension funds." In other words, they found investors who put money into the market in a way similar to how pension funds invest and used those results instead of CalPERS' actual historical record.

California Treasurer Bill Lockyer resigned as an SIEPR advisory board member after the report was issued, noting tersely: "When it comes to public pensions, maybe SIEPR should stand for 'Stanford Institute to Eviscerate People's Retirement.' "

This isn't the first time SIEPR has gotten it wrong. Last winter, they claimed that CalPERS' actual earnings were 4.14 percent, the so-called risk-free earnings rate. That inaccuracy spurred a Little Hoover Commission report, causing public panic over a pension crisis that doesn't exist. After catching much flak from economists, SIEPR issued the new report with its slightly higher earnings projections.

According to the Legislative Analyst's Office, pension costs are among the smallest and slowest-growing in state government, making up less than 3 percent of the total budget. All the while, public-sector unions are helping to ensure that pension funds remain stable and their benefits affordable.

That is not to say that there isn't work to be done. While pensions account for less than 3 percent of the budget, corporate tax loopholes amount to tens of billions lost from the budget. Even after budget cuts, new loopholes rob public education and other programs of $1 billion per year, that money instead going to fill the coffers of Wall Street corporations.

Facts are facts. While we know CalPERS and the California Teachers' Retirement System are irreplaceable sources of retirement security for hundreds of thousands of workers, the defined-contribution system favored by its critics is badly broken. According to the Wall Street Journal, the median household headed by a person aged 60 to 62 with a 401(k) has less than one-quarter of the savings needed for retirement. That's a fact we ignore at our own peril.

This article appeared on page A - 6 of the San?Francisco?Chronicle

Source: http://feeds.sfgate.com/click.phdo?i=99a8d48873ef1ddd58952ca2425a2064

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