Pension Funding & Rates of Return

In a March 18th interview (view video), California Gubernatorial candidate Meg Whitman expressed the problem with pensions quite accurately, stating “there is a current period cost of pensions, and that cost is only going to increase.” Whitman went on to say that CalPERS may lower the long-term rate of return they use for their pension fund earnings projections. One of the solutions Whitman offered to California’s pension crisis was to suggest California’s non-safety employees defer retirement from the current age 55 to age 65, and also for California’s non-safety employees to contribute 10% of their salary to their pension fund instead of 5%. How much will this help?

If we assume these reforms are applied at the local level as well – since most public employees in California work at the local level – the calculation of savings based on doubling the average employee contribution from 5% to 10% is fairly straightforward. There are about 1.6 million non-safety, non-federal public employees in California, and their average salary is $60,000 per year. If you take 5% of that, $3,000, and multiply by 1.6 million, you get nearly $5.0 billion per year in savings to the taxpayer. Is this significant? Will this help?

To answer this question, the biggest variable by far is what rate of return you calculate for the pension funds themselves. To illustrate this, consider the impact of Whitman’s other proposal, to raise the retirement age from 55 to 65 years old. As the table below […] Read More