Pension Crisis

CalPERS' Earnings Flop Means Taxpayer Belt Tightening

Underperforming the market, overestimating future success


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.

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  1. I blame trump.

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  2. CalPers is royally screwed. They heavily invest in bonds and low interest rates are killing them. The remainder in the stock market is going to get clobbered shortly.

    1. Agree Lee, Amazing how CalPers can invest in government and muni bonds essentially lending debt to debt at sub-market returns.

  3. If my 401(K) performs poorly, it’s the government’s fault, no?
    Or is it the greedy people’s fault?

    Anyway, not my fault! we need find those who are responsible!

    1. Well, the fault is shared between the do-nothing Republican congress and the greedy banks. They’re all in bed together anyways because of money in politics and the Koch Brothers and all that.

      1. You need to make sure you add /sarc thom lol

  4. The lesson: Elect people who negotiate better contracts.


  5. wait till CA comes to Uncle Sucker to ask for a bailout. The we are ALL on the hook for this madness.

  6. Taxation levels inversely correlate to a nation’s collective intelligence.

    Brainless masses form the wet dreams of tax men.

  7. The cover up…..-arrested/

  8. “Taxpayers screwed”
    They don’t even run a film at 11 any more.

    This isn’t “news” it’s “olds”.

  9. CalPERS’ Earnings Flop Means Taxpayer Belt Tightening
    Underperforming the market, overestimating future success

    Maybe they didn’t invest enough of their capital in green energy projects.

    1. +1 Socially Responsible Investment

    2. I’m sure they’ve divested themselves of the evil Israeli markets.

      1. and invested in high speed rail!

  10. I posted a link on this several days back; the claim is the funds are ‘taking the long view’. This means they’re investing in losing green endeavors, and taking a bath as a result.
    So we have officials engaged in ‘social engineering’ with our money and doing every bit as well as Obo did with Solyndra.

  11. Even if 100% invested in the S&P 500, Calpers would have made roughly 3% between 7/1/15 and 6/30/16.
    By looking up the S&P closing figures, I got curious about how my (and my employers’ portion) of social security would have fared. $10K, which was my career s.s. contributions at the time, invested in 1976 would have grown to $600,000 today. It gets better because the S&P grew by roughly 20 times since 1976, not including re-invested dividends. So my contributions since 1976 would be worth something north of $3 million today. Call the total $3.6 million and at a 3% payout that’s more than $100K per year, at least three times what I actually get from s.s.

    1. I see your problem, you think it’s all about you. Hillary’s free education will correct such errors in the future.

  12. This is politico-economic. Reason does not get into such talk. It cramps the optimism. Things are better than they have ever been and will only get better. Massive debts, massively underfunded defined benefit plans at every level, banishing of interest bordering consideration of NEGATIVE interest rates, currency debasement necessarily coming to a “useful” end are mere afterthoughts. What harm can they do? We’ve always pulled through before! Easy cheese.

  13. So we have officials engaged in ‘social engineering’ with our money and doing every bit as well as Obo did with Solyndra.

    When you’re sleeping on the street, social justice will keep you warm.

  14. Calpers returns are based on 1981 Treasury yields. And 8% was actually conservative in 1981.

    It was Calpers et al that actually demanded Fannie and Freddie become reckless because God forbid Calpers adjust its return target to contemporary reality.

    At this point, Calpers and its brethren are terrorist organizations.

  15. A fool and their money are soon parted.

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  17. And now proving they have absolutely no shame, CalPERS lies about its returns by cherry-picking dates:…..ic-by.html

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