How Rates of Return Affect Pension Contribution Rates

In the post “How Rates of Return Affect Required Pension Assets,” the point is made that depending on the rate of return achievable by the pension fund, there are significant changes to what level of assets are required for that fund to remain solvent. This post takes a slightly different approach; looking at an individual pension participant, how do pension fund rates of return affect how much they will have to contribute into their pension each year?

To make this estimate, the same set of assumptions are used in this post as in the previous post; they are:

The participant works for 30 years and they are retired for 30 years. The participant earns a pension equivalent to 66% of their final salary. The participant’s salary, in real (inflation adjusted) dollars, doubles at an even rate between the time they begin working and when they retire. The rate of return and the rate of inflation are held constant throughout the 60 year period under analysis. The rate of inflation is assumed to be 3.0% per year (this is CalPERS official projection, and is consistent with the historical average for the last 90+ years).

Here’s what we get:

There are a lot of takeaways here, but the most important is this: Even at a return of 7.5% per year, which is actually slightly below CalPERS official long-term projected annual return of 7.75% per year, using these assumptions there [...] Read More

Require CalPERS to Invest 100% in California?

According to the CalPERS website, in their California Investments section, “as of January 31, 2011, approximately 10.3 percent of CalPERS total assets are invested in California.” This means that out of the $233.5 billion in assets under management by CalPERS (ref. Current Investment Fund Values), $24 billion is invested in California.

Apparently CalPERS would have us believe that investing 10.3% of their assets in California is a praiseworthy accomplishment, since their disclosure goes on to state “CalPERS is one of the largest investors in California – providing jobs, services, and a financial boost to the State’s economy.” But why shouldn’t CalPERS invest 100% of their funds in California?

Back in 2004 I attended a business forum focusing on the Sacramento region, and listened to a panel of experts discussing California’s economic prospects. One of these experts was an investment manager from CalPERS, who stated with pride that “fully 20% of CalPERS investments are made in California.” (Note: it’s only half that much today) At the time, I asked him why we should be impressed by the fact that 100% of CalPERS funds come from California taxpayers, yet only 20% of those funds go back into California-based investments. His answer was instructive: “We have to invest where we can realize the largest returns.”

The debate over whether or not public employee pension funds are sustainable hinges on one key question: What are the largest sustainable, long-term returns possible? And from that [...] Read More

How Rates of Return Affect Required Pension Assets

While pension finance is a relatively obscure discipline that requires of its practitioners expertise both in investments and actuarial calculations, it is a mistake to think the fundamentals are beyond the average policymaker or journalist. One policy question of extreme importance to discussions about the future of public worker pensions is how much pension funds can legitimately expect to earn over the long term. The reason this question is critical is because the more the pension fund earns, the lower the annual contribution will have to be. Just how much lower each percentage point gain offers is startling.

In the first table (below), conservative assumptions are offered towards estimating how much the pension funds of California’s state and local workers must earn each year. The number of active state and local government workers is fairly well documented at 1.85 million (including K-12 and higher education). The $68,000 per year annual salary is actually low, since that is the average salary, and pension fund calculations are based on the higher final salary. This means the $68,000 figure is accurate for estimating the money flowing into the pension system, but will understate the amount of money flowing out of the pension system to retirees. Similarly, the 33% average pension fund contribution is on the high side – typically only public safety employees, who are only about 15% of the state and local government workforce, contribute amounts over 30% of their salary into the pension funds. But based on these numbers, each year [...] Read More

Which Special Interests Are Partisan?

A commenter to the previous post, “Is Union Reform Partisan,” took issue with the observation therein that corporate political spending is less partisan than union political spending. The commenter requested evidence to back up that claim, and suggested that not only is corporate spending equally skewed in favor of Republicans, but that corporate political spending far outweighs political spending by unions. These are fair questions, and the data that follows draws from the same source used in that post, which documented that 95% of union spending goes to Democrats.

Parsing data from, again, “a nonpartisan, independent and nonprofit research group tracking money in U.S. politics,” this time I will present information on all of the top 100 political spenders during the eleven election cycles between 1990 through 2010. These top 100 are divided into four categories; corporate, financial, union, and grassroots. The results were quite surprising, as summarized on the chart below:

The data used to generate these numbers comes from’s “Top All-Time Donors, 1990-2010” table, which I downloaded onto spreadsheets and sorted into the four categories noted, while retaining in the far left column the rank of each contributor within the top 100. So the reader may view my assumptions, all four of these tables constitute the remainder of this post.

Readers are invited to mull the implications of these findings regarding the top 100 political spenders of the last 20 [...] Read More