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 hammered in the last few years and will have to bounce back at rates in well in excess of 4.75% per year if they are to remain solvent (for more on these calculations, ref. Maintaining Pension Solvency).
Another “real truth” about public employee pensions is they currently collect benefits in retirement far in excess of what private sector workers can expect from social security. Public sector workers accrue retirement benefits according to a formula that grants them between 2% and 3% of their final year’s salary, times the number of years they worked. The 3% formula, for example, means that a public sector worker who spent 25 years in the workforce would receive a pension equivalent to 75% (3% times 25 years) of their final salary when they retire – with annual adjustments upwards for inflation. This benefit often begins when public sector workers retire in their early 50’s. An apples-to-apples comparison with social security provides for about 0.7% per year in retirement “pension” for private sector workers, which is at best one-third what a public sector worker receives – even though the private sector worker retires 15 years later! And social security doesn’t begin until one reaches their mid-sixties. When defenders of California’s public sector pensions – such as Blanning – reference an “average” pension for public sector workers of only $2,100 per month, they are not mentioning the fact that this number includes pensions for workers who were only in the public workforce a few years – and these workers would therefore also be receiving social security.
In the past, public sector workers received a pension that exceeded social security because they made less during the years they worked. But this has changed completely, and today, public sector workers, on average, make more than private sector workers. They also enjoy far more paid time off – they often get 26 paid days ala the “9/80” program (where they work 9 hours per day for 9 days, then get a paid day off, i.e., 26 paid days off per year), 12 “personal days,” anywhere between 10 and 20 vacation days, plus between 14 and 17 paid holidays. Find a private sector job that provides 75 paid days off per year. California is already one of the most heavily taxed states in the U.S., yet while roads and aqueducts crumble, taxpayer-funded public employees enjoy lives of inordinate privilege and security. And if public employees earned market rates of pay and benefits, like the rest of us, there would be no deficits (ref. California’s Personnel Costs).
Perhaps the most questionable of Blanning’s arguments was this one: “Of that $2,100 [the “average” monthly benefit of a retired public servant in CalPERS], only $1 of every $8 is paid by the employer, which means the taxpayer. The rest is paid through employee contributions and earnings on the investments.” If you dissect this, it is hard to follow exactly what Blanning is trying to say. Because if this means the state (on behalf of the taxpayers) is only paying 1/8th of the funding growth required by CalPERS for each worker for their portion of the retirement fund, this suggests the other 7/8ths is being covered either by the workers themselves through withholding from their paychecks, or by fund growth through investment returns. This, in-turn, suggests Blanning is saying that CalPERS expects virtually all of its funding to come from return on investments, since most public sector workers don’t even have half their retirement fund inputs withheld from their paychecks – which is what private workers contribute to social security via withholdings. Many public pension recipients don’t have anything withheld from their paycheck to go towards their pension fund.
If California’s public employee pension benefits are not dramatically reduced, hopeful rhetoric aside, the California taxpayer is liable. Pension fund managers were over-optimistic in their projections, and using more conservative scenarios their pension funds are already insolvent. Under the current arrangement, public employees, who pay very little of the costs of their future benefits in the form of withholding from their paychecks, are expecting to receive defined retirement benefits that dwarf anything a private sector worker can reasonably expect in their own retirement. And under the current arrangement, these taxpayers are supposedly going to pay – through even higher taxes (and fees) – the difference between what public employee pension funds expect to earn in the market, and what they actually earn in the market. Until the whole system is reformed, that is the reality in California today.
To suggest that the pay and retirement benefits that public employees currently enjoy is guaranteed by the California constitution or by “contract” is to ignore reality. California’s constitution can be amended by a citizen’s initiative. And the “contracts” that created these grossly inequitable and financially disastrous public employee benefits were the product of public sector labor unions exercising inordinate and unjustified influence over state and local politicians. This is the crux of the problem, and must be reformed along with reforms to reduce public sector pay and benefits. Public employees, through their unions, pour millions of dollars into political campaigns every year in California. They currently exercise nearly absolute control over California’s state and local governments. When the people collecting the benefits are controlling the politicians who grant the benefits, no contract should be considered inviolable – particularly when the alternative is bankruptcy.