Pensions

Demographic Changes Threaten Pensions

New report: There eventually will be more retirees collecting pension checks than there will be employees paying into the system

|

In a 2011 profile about California's ongoing fiscal mess, Vanity Fair interviewed San Jose's then-Mayor Chuck Reed, a progressive Democrat who has for years been warning about coming cuts in public services if the state's pension systems don't get benefit levels under control. Reed did the math and the picture wasn't pretty.

"By 2014, Reed had calculated, a city of a million people, the 10th-largest city in the United States, would be serviced by 1,600 public workers," according to the piece. "The problem was going to grow worse until, as he put it, 'you get to one.' A single employee to service the entire city, presumably with a focus on paying pensions."

Pension activists still refer to Reed's "joke," but it wasn't really a joke and it's certainly not funny. Defenders of the current pension system accused Reed and the state's pension reformers of overstating the problem.

But while San Jose and other cities will never literally reach a single employee who sits in the room mailing out pension checks, the trajectory is headed in that troubling direction. One city manager even quipped to a newspaper a few years ago that cities are becoming pension providers that offer a few public services on the side.

Now even the California Public Employees' Retirement System, the nation's largest pension fund and one of the state's most adamant opponents of pension reform, released a report in November that bolster's Reed's case. Its key finding: There eventually will be more retirees collecting pension checks than there will be employees paying into the system. This is a nationwide trend in public-pension systems, and one that's tough to ignore.

"A pension plan in its infancy will have a very high ratio of active to retired members," according to the report. "(T)he ratio for CalPERS has dropped from just above two (active members) to just below 1.5 over a 10-year period. … (T)hese ratios are also expected to continue dropping over the next decades until they reach a floor somewhere between 0.6 and 0.8."

That means more people will be receiving money from the system than putting it into it, thus challenging CalPERS' ability to fund retirement promises. It could lead to a further reliance on risky Wall Street investments to make up for the shortfalls and continued increases in the contribution rates CalPERS assesses to participating agencies. Cities will be pushed to raise local taxes or cut back services.

Local agencies already are reeling from recent rate hikes. "For many plans, the contribution rates have never been as high as they are now," according to the CalPERS report. These agencies already pay 30 percent to more than 50 percent of each employee's salary into the retirement system. This is a big chunk of cash.

Public employees receive defined-benefit pensions guaranteeing them a payout based on a formula. The agencies they work for contribute into a pension fund, which invests the money. The funds, such as CalPERS, predict a rate of return. Higher returns on these investments reduce the size of the debt, whereas poor returns create a bigger "unfunded liability" problem.

"This is just another indicator about the unsustainability of the pension promise," said Dan Pellessier, president of California Pension Reform. This information doesn't change the size of the liabilities, he notes. But it does affect the money flowing into the system to pay off those liabilities. There will be fewer active employees to help CalPERS dig out of its hole.

"CalPERS is finally demonstrating some fiduciary responsibility in better describing the magnitude of its problem," Pellessier added. Nevertheless, the big question is what the agency plans to do about it. CalPERS has been meeting its investment targets, yet these and other demographic changes point to deep trouble any way.

Legislative leaders are unlikely to tackle this issue when they return to the Capitol given their political leanings. For years, it's been easy for them to depict Reed's and other reformers' warnings as hyperbole, but it's going to be much harder for them to ignore CalPERS' latest findings.

NEXT: Friday A/V Club: Before Rodney King

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. No problem a high speed rail line can’t fix, somehow.

    1. It will definitely create a lot of public sector union jobs.

      Taxpayers will be on the hook for their salaries and their inevitable pensions, but, hey, they’re doing something about the retiree-to-worker problem.

  2. Not just a California problem, either. Cities and school districts in PA are cutting lots of staff in order to pay pensions.

    1. Again, I don’t see cutting government staff as a negative. We’ve been asking for that very thing for decades and all we’ve gotten is more public employees.

      I realize the spending isn’t falling as the government employment is falling, but if we have to get the results the backwards way I guess I shouldn’t complain.

      1. All of the cost, none of the services.

        That is not a good deal. I suppose once the pensioners die, then you have “shrunk” government.

        The new employees also usually don’t get the good pension deals like the older people get.

  3. OT from the Prog Side

    http://thinkprogress.org/justi…..shootings/

    Under the bill awaiting Obama’s signature, states receiving federal funds would be required to report every quarter on deaths in law enforcement custody.

    …also…

    http://thinkprogress.org/justi…..d-in-2014/

    Sadly, we know Brown and Garner were just one of many people who died at the hands of police this year. But a dearth of national data on fatalities caused by police makes it difficult to pinpoint the exact number of deaths. One site put the total at 1,039.

    1. Brown and Garner were just one of many people

      I know thinkprogress loves collectivism, but I mean come on.

      1. I thought blacks counted as 2/3 of a person, not 1/2 – so wouldn’t it be “were 1 1/3 of many people”?

        Srsly…

        /not srsly

    2. It’s funny: of all the things we can track, how many people cops kill just isn’t one of them.

  4. OT: peak hipster reaches Loooondon? (the first video is fucking awesome)

  5. I buy almost everything except food and clothing from online auctions most people aren’t aware of the almost I unbelievable deals that they can get from online auction sites the site that has the best deals is…..
    BEST HOME BASE GIFT——– http://snipr.com/29inp5v

    1. ALL YOUR HOME BASE ARE BELONG TO US.

      1. FOR GREAT JUSTICE, TAKE OFF EVERY GIFT!

      2. I never could find a good picture of a Home Base store to use for that. Then they went out of business.

  6. By 2014, Reed had calculated, a city of a million people, the 10th-largest city in the United States, would be serviced by 1,600 public workers… The problem was going to grow worse until…you get to one.

    Is there any way we could speed this outcome up a bit?

  7. “For years, it’s been easy for them to depict Reed’s and other reformers’ warnings as hyperbole, but it’s going to be much harder for them to ignore CalPERS’ latest findings.”

    Sure it is.

  8. Start working from home! Great job for students, stay-at-home moms or anyone needing an extra income… You only need a computer and a reliable internet connection… Make $90 hourly and up to $12000 a month by following link at the bottom and signing up… You can have your first check by the end of this week…….

    http://www.Jobs-spot.com

  9. Because it’s totally unreasonable to expect people to put their own money into savings accounts and provide their own retirement it is therefore mandated that a portion of their salary be given to the government for them to ‘save’ for you in Wall Street investment accounts.

    I mean, it’s so obvious that only a Progressive would think of it!

    1. You know, as Gruber pointed out, Americans are stupid.

      1. booboobambam|12.12.14 @ 6:00PM|#
        “You know, as Gruber pointed out, Americans are stupid.”

        No, he actually pointed out that those who believed his lies are stupid.
        Lefties believed his lies; the rest of us call bullshit.

  10. Well duh. What does one think will happen when 1/3 of babies conceived are aborted and there are higher numbers of the elderly than ever before? Why do you think the Progressives and RINO’s want to grant amnesty to millions of illegal aliens? So they can replace the dead babies by paying taxes to support the pensioner’s. The only reality is young people are totally screwed because they aren’t going to get anything except higher taxes and no benefits. Yet they are, for the most part, big supporters of Democrats who have tirelessly worked to get more people on the dole, more government workers receiving lucrative salaries, benefits and pensions, and giving illegals a bunch of freebies paid for by a dwindling number of taxpayers.

  11. “The Japanese village of Nagoro once was home to hundreds of families but now has only 35 residents who are outnumbered by scarecrows placed around the town by a local resident,
    […]
    Since 2010, Japan’s population began to decline, the AP reported. Their population of 128 million will decrease by 2050 to 108 million, and then down to 87 million by 2060, at which point four in 10 Japanese will be over 65 years old.”
    http://www.hngn.com/articles/5…..z3LjK2ls8M

    Paul Ehrlich is *PISSED* that this didn’t central planning.

  12. 30% to 50%? Plus state, local and federal taxes? Well, I guess that’s not too bad… if they’re paying $2 million per year!

  13. Pension administrators couldn’t foresee funding issues long ago? Why are they waiting to take action? Just do nothing until the system goes bankrupt?

  14. Pensions, Social Security, any similar money shifting plan that relies on many people not living long enough to collect more than they paid in is essentially a Ponzi scam.

    But it’s even worse with the ones where there isn’t even a pretense of investing the money to keep the ability to pay it out.

    This is a big part of why GM went bankrupt. After the unions forced GM to handle the employee pensions, the scheme hit a peak of about 100,000 employees paying in, with nearly a million retired employees getting pension payments.

    Damn people just living too long! Same as has happened to Social(ist) Security. When it was established, most people kicked off in their late 60’s. Some lived to their 70’s. 80’s was rare and making it to 90 was like people making it to 105 is now.

    It’s turned out that a rather large chunk of the people who were kids at the founding of SS in 1935 have stubbornly failed to die soon enough to keep it solvent, and the generations since have been even worse at the death thing.

    1. SSI was created as a congressional slush fund and sold as a safety net against poverty in old age. After all, who would vote for a congressional slush fund?

      1. The SSI system was modeled after the private railroad retirement system, but with one glaring difference: the RR system was (and remains) solvent because we actually pay enough into it.

        But it works for us on the railroad; it doesn’t work for a nation full of people earning vastly different incomes over vastly different periods of time, how do you even provide accurate actuarial calculations for such a thing? I know: you don’t, you make it up as you go along; you conveniently forget to adjust for increased average lifespans, and hope you’re dead before the whole thing goes bust. But isn’t that what statism is all about?

        1. Actually, the railroad retirement system is modeled after Social Security which was being drafted, and it is designed identically to SS except taxes on employees are higher to pay for higher benefits – employer taxes are the same as SS.

          The railroad trust fund has a lot less cash in it per employee and retiree than Social Security.

          Both are built on current employees paying the benefits of past employees in retirement.

          1. “Both are built on current employees paying the benefits of past employees in retirement.”

            Which means they both are designed to fail.

  15. Currently, in line with the proposed actions of the Fed, for every one dollar intended to be paid out 30 years from now two dollars should be set aside. In 30 years a dollar will purchase what about 55 cents does today, hopefully. The dollar will NOT gain value over time, and would quickly bankrupt our nation if it did.

  16. my co-worker’s mother-in-law makes $89 an hour on the laptop . She has been without a job for five months but last month her check was $17879 just working on the laptop for a few hours. go to the website….
    ?????? http://www.payinsider.com

  17. Great way to share your thoughts infortunatly it’s a little bit confusing ….. however i would like to share my own simple tips to be more productive

    Check full details now! …. http://WWW.MONEYKIN.COM

  18. Natalie . even though Steven `s artlclee is nice… I just purchased Peugeot 205 GTi after earning $6824 thiss month and-even more than, ten grand this past-month . with-out any question its my favourite job Ive had .
    Best way to keep join======== http://www.jobsfish.com

  19. Google pay 97$ per hour my last pay check was $8500 working 1o hours a week online. My younger brother friend has been averaging 12k for months now and he works about 22 hours a week. I cant believe how easy it was once I tried it out.
    This is wha- I do…… ?????? http://www.jobs700.com

  20. my classmate’s mother makes $83 hourly on the computer . She has been out of a job for five months but last month her paycheck was $13982 just working on the computer for a few hours. Check This Out………

    http://www.Jobs-spot.com

  21. CalPERS invests employer and employee contributions in the stock market so if CalPERS fail to support pensioners then IRAs and 401Ks invested in the stock market and REITs will fail to support retired workers.

    I guess the authors are saying that everyone needs to work until they drop, or live homeless and hungry until dead.

    1. mulp|12.13.14 @ 8:49PM|#
      “CalPERS invests employer and employee contributions in the stock market so if CalPERS fail to support pensioners then IRAs and 401Ks invested in the stock market and REITs will fail to support retired workers.”
      CalPERS promises more than the market returns; what is your point?

      “I guess the authors are saying that everyone needs to work until they drop, or live homeless and hungry until dead.”
      I guess you’re either a troll or not real bright, or both.

      1. “mulp” is right.
        Only FEDGOV could get away with having a pension system that uses current employees contributions to pay retirees pensions – its called Social Security.
        CalPERS invests the money from employees and employers to set up an account that actuaries determine will pay out the benefits for a lifetime. Some of those lifetimes are longer than estimated but some are shorter. The fact that CalPERS has so many clients, lets it work itself out.
        The only problems with public, or private, pension systems comes when the employer – public or private – fails to make their end of the contribution – the employees portion comes directly from the paycheck – leaving the accounts underfunded.
        Don’t attempt to take it out on the employee, who is counting on a payout he has made every payment asked of him/her, it is politicians that siphon off the funds.

  22. Google pay 97$ per hour my last pay check was $8500 working 1o hours a week online. My younger brother friend has been averaging 12k for months now and he works about 22 hours a week. I cant believe how easy it was once I tried it out.
    This is wha- I do…… ?????? http://www.jobs700.com

Please to post comments

Comments are closed.