Pension Rhetoric vs. Pension Reality

As California’s public employee retirement system teeters on the verge of complete financial collapse, defenders of the current system continue to deny this, often accusing reformers of being “public servant bashers.” But politically motivated rhetoric will not change financial reality – or the pursuit of reforms so private workers don’t endure punitive taxation to sustain a privileged class of government employees. Last week the Sacramento Bee published a guest viewpoint written by Bruce Blanning, the Executive Director of the Professional Engineers in California Government. His commentary, entitled “State retirement benefits make an easy – and unfair – target,” invites a rebuttal.

The “real truth” about CalPERS, and other public employee pension funds, is they have consistently overestimated their long-term rates of return, adjusted for inflation. Currently CalPERS official rate of return, used for projecting the funds they will have available in the future, is 4.75%. This rate exceeds key long-term indicators that should govern these projections. For example, the inflation adjusted rate of return for the Dow Jones stock index for the period 1925 through 2008 averaged 2.8% per year. Similarly, the real rate of global economic growth for the period 1950 through 2000 averaged barely 4.0% per year, and this rate was skewed upwards by debt-fueled, unsustainable growth during the 1990’s. Even at a rate of 4.75% per year, CalPERS and the other pension funds are in a precarious state, because their asset values have been [...] Read More

California’s Union Ballot Initiatives

It isn’t fair to criticize California’s conservatives for failing to back public sector union reform initiatives (ref. “The Conspiricy of Cowardice“) without acknowledging the power of the opposition. Earlier this year, commentator George Will called California a “unionocracy,” in an attempt to describe the power wielded by public sector unions over California’s government. Republican lawmakers in California, off the record, have stated the public sector unions exercise “absolute power” over California’s legislators. And why wouldn’t they? Every month, well over a million unionized public sector workers in California have a portion of their paycheck automatically deducted for union dues, and significant portions of these funds are used for political lobbying and independent expenditure campaigns. In aggregate, the amount of money available to these unions, who don’t have to ask anyone for a cent, overwhelms any candidate who won’t play ball.

There are far reaching consequences to politicians not standing up to California’s public sector unions because they will lose access to their campaign donations or become targeted by them. By controlling the politicians, public sector unions control legislation and they control the agencies. Businesses who do business with California’s state and local governments are understandably wary of antagonizing the public sector unions, since they make or break the politicians who supposedly oversee the agencies. Would anyone risk angering officials are all members of these powerful unions, people who can shut down their business or deny them a contract? One businessperson told me that the [...] Read More

Ayn Rand’s Atlas Shrugged

The thought of actually reading Rand’s gargantuan tome, Atlas Shrugged, a book you could use as a cornerstone, filled me with apprehension. And while the novel resonated with me far more than expected, it is fair to wonder if someone who didn’t agree with anything Rand was trying to say – she is not subtle – might find it tough to get past the first couple of hundred pages. But by that point I was hooked on the story, which chronicles the final decade of the descent of the United States from capitalism to communism. To discuss everything noteworthy about Rand’s novel would go well beyond the scope of any brief review. For example, Rand exposes the hypocrisy and futility of communist ideology quite well, but doesn’t bother to dilute the purity of her alternative vision by explaining that its consequences are genuinely altruistic. Rand never explicitly acknowledges that encouraging people to pursue their individual self-interest, through lower taxes and limited government, enables more wealth creation and hence more prosperity for everyone. One key admonition Rand makes is of concern here, however, because it has immediate and urgent relevance to California’s citizen’s initiative political season, a fight being waged right now, that hangs in the balance.

The biggest sin of Rand’s good guys in Atlas Shrugged – the businessmen – was that these businessmen never defended themselves, much less took the offense. They practiced appeasement with the “peoples” interests, and acceded to big government regulations, apparently hoping they would be [...] Read More

The Conspiracy of Cowardice

One may search for the answer to the Republican riddle across America – how to attract all those suddenly disaffected independents and moderate Democrats. After all, the political pendulum only seems to be impelled by repellent forces, never by attractive ones. And what might attract anyone to the Republicans, simply because the Democrats have become repellent?

Closer to home, in lovely California, a state so beautiful that even native sons who ought to know better can’t seem to leave, the Republican failure is easy to grasp. Republicans, nationally and in California, never fought more than half the war – they did, at the least, a defensible job fighting taxes, but never effectively fought spending. The result is deficits – and borrowing is spending, as underwater homeowners along with bankrupt municipal governments are painfully discovering.

A tragic example of just how far from leadership, legitimate populism, or genuine convictions the conservative leadership in California has sunk is the plight of the public sector union reform initiative that still needs signatures to qualify for California’s November 2010 ballot.

There is not one conservative political insider who doesn’t believe the “Voluntary Political Contribution Initiative” is a long overdue reform to California’s political system. Nobody. This initiative will dramatically curtail the ability of California’s public sector unions to use member dues to engage in political activity. Currently California’s public sector unions collect nearly 1.0 billion dollars per year in member dues, and they use a significant percentage of [...] Read More

Sustainable Pension Fund Returns

Crucial to any analysis of pension fund solvency is determining what rate of return a pension fund can earn. And in any such analysis, the “real” rate of return is what matters. It doesn’t matter, for example, if a pension fund investment yields double-digit annual returns, if the fund is returning these impressive numbers in an economy in the grips of double-digit inflation. The real rate of return for any investment is calculated by taking the actual return, or nominal return, and subtracting from that the rate of inflation. For example, CalPERS currently uses a nominal rate of return of 7.75% for their fund’s earning projections, and they assume a 3.0% rate of inflation. Therefore CalPERS currently projects their fund to earn a 4.75% real rate of return.

In several previous analyses we have examined the implications of these rates of return on the ability of pension fund investments to remain solvent. Basically, the higher the real rate of return on pension investments, the lower the required annual payments necessary to adequately fund the same level of future retirement pension benefits. By the same logic, if pension investments earn higher than anticipated real rates of return, it is possible to increase future benefit commitments without increasing the annual funding payments. This second case is what happened back in 1999, during the height of the internet boom, and continued right up until the financial crisis that began in 2007. Even after these bubble booms went bust, some public employee unions continue [...] Read More