According to a recent article, the California Public Employees’ Retirement System (CalPERS) is considering a meaningful reduction in the investment return it assumes when establishing pension contributions. Future generations should hope CalPERS’s board makes the change.
Public employee pension costs are supposed to be shared by employees and citizens. Together they contribute money when pension promises are made in the expectation that those contributions plus investment earnings over time will be sufficient to meet the pension payments as they fall due. But the togetherness ends there because only citizens are on the hook if there are shortfalls. That wouldn’t be a problem if upfront contributions were fairly set. But in California they are set by pension fund boards like CalPERS that are controlled by public employees motivated to keep the employee share of pension costs low. As explained here, they accomplish that by assuming unrealistically high investment returns. That keeps employee contributions low but eventually creates deficits for citizens.
This is not a new subject and CalPERS is not the only offender. I was removed from a California pension fund board a decade ago for making this point. But despite warnings from investors such as Warren Buffett and protests by Governor Jerry Brown, pension funds continue employing unrealistic assumptions to the detriment of future generations. Pension deficits are already crushing public services and causing tax increases. Failure to reduce the assumption would mean even greater future deficits.
CalPERS is the nation’s largest pension fund. Its board should set an example for other pension funds. Everyone keen to protect future generations from pension deficits should applaud when they do.