Earlier this year, I watched in horror as my 401(k) earnings started a freefall right before I planned on shifting some assets into a lower-risk fund. Things corrected, but my investment mistakes are my problem. If I do something stupid, I might spend retirement in a trailer near Landers rather than in an oceanfront condo.
Consider this in the context of this month's news from the California Public Employees' Retirement System. On July 18, the largest state investment fund announced a piddling 0.61 percent rate of return in its latest 12-month period. The system is significantly underfunded. CalPERS blames a bad year in the markets. Defenders of the status quo suggest all is well–the rebounding market will correct itself and fix the mess.
State Sen. John Moorlach (R-Costa Mesa) notes that the Dow Jones, the fixed-income market and the real estate market have been at all-time highs: "Now we're in Peter Pan territory. 'You've just got to believe'… the stock market will rise more than 7.5 percent per year. You've just got to believe that interest rates will stay at zero indefinitely. You've just got to believe that real estate prices will continue to rise."
What happens if they don't? This much is certain: Public employees will not have to alter their lifestyles. Recently retired public employees will still receive their lush benefits. Public-safety formulas, for instance, guarantee employees can retire with 90 percent or more of their final years' pay at age 50. Somebody has skinned the hog. And it's not taxpayers. The East Bay Times reported last week that CalPERS' retirement debt "averages out to $11,000 for every California household which is relevant because taxpayers, not government workers, must make up the shortfall."
For private-sector employees, we invest our pre-tax cash into a fund–and sometimes employers match a portion of it–and our final retirement payout is determined by how much we put in the account and how well the investments perform. We combine that with a reduced retirement lifestyle and other investment income.
For public employees, their agency guarantees a retirement payout based on a formula (plus a bunch of pension-spiking gimmicks). It invests the funds employers and employees contribute. When investment returns are great, the fund has plenty of cash to pay for pension promises. But when they are low, an unfunded liability–or taxpayer-backed debt–emerges. That's why CalPERS' piddling earnings should concern us.
State courts have consistently ruled public employees' pensions can never be reduced–even going forward. They are safe unless a municipality goes bankrupt. As debt rises, local and state agencies have to contribute more. Services have to be cut.
CalPERS and its union-dominated board are all about protecting these enormous pensions, so they tell the rest of us not to worry. They even justify plans to expand benefits. The people who directly benefit from the system get to make all the decisions. Other people pay the tab. It's the opposite of our personal-investing scenarios.
CalPERS has an aggressive earnings assumption of 7.5 percent a year. Union spokespeople argue that CalPERS spreads out the investment ups and downs over many years and hits its mark over the long haul. That's a nice way of saying current CalPERS officials and state politicians are kicking the can down the road. And think back to what Moorlach said. Can this keep going?
As an aside, if these union folks are right, then there's no need to have taxpayers back this scheme. If it pays for itself, then it should pay for itself without having to rely on everyone else as a backstop.
Despite this being one of the state's biggest fiscal problems, Gov. Jerry Brown (D) and the legislature rarely mention it. To do so would mean offending the most powerful players in the Capitol–and would obliterate the false narrative that California's budget is in good shape and that there's plenty of money to spend on new programs.
"Positive performance in a year of turbulent financial markets is an accomplishment that we are proud of," said CalPERS Chief Investment Officer Ted Eliopoulos, in a statement. What he didn't say: Those Californians expecting a meager High Desert retirement will need to further tighten their belts to pay for those enjoying those Pacific views.