Pension Deficits Are Not Like Droughts
Last week the Sacramento Bee published a guest op-ed by Yvonne Walker, who leads an employee association, that likens public pension deficits to droughts fixable with a good winter of rain. But that’s not a valid analogy. Unlike water deficits, pension deficits compound. As a result, years of healthy investment earnings cannot close pension deficits. Ironically, Walker herself supplies the proof with these two sentences from her op-ed:
- “[CalPERS’s] investment returns over the last 20 years have averaged 6.7 percent.”
- “[CalPERS’s] funded ratio [today] is at about 63 percent.”
Yet CalPERS’s funded ratio 20 years ago was 111 percent! Ie, despite averaging a wonderful 6.7 percent annual return for 20 years, CalPERS’s funded ratio fell 48 percentage points. That’s because pension liabilities compound at high rates, as explained here. Even a hefty annual return for 20 years — one that even exceeds the 6.1 percent return Warren Buffett assumes his company’s defined benefit plan will earn — can’t keep up.
Walker’s op-ed is another sad demonstration of pension-cost-deniers behaving like climate-change-deniers. Californians have already suffered enough from deniers, as explored here, here and here. Deceptively-hidden pension liabilities are already ravaging education and other public services and already causing tax, tuition and fee hikes. More deception just produces more pain for citizens.
Walker’s op-ed arrived just as Federal EPA Secretary Scott Pruitt announced a program to criticize climate science and Jerry Brown announced the pension-equivalent of artificial rainmaking to help replenish CalPERS’s depleted reservoir, as explained here. Needless to say, it’s well past time for financial and climatic truth-telling.