In August, an LA Times report exposed that CalPERS has spent billions on the “most rarefied services” that Wall Street has to offer, including paying what’s expected to be a “ginormous” amount in bonuses and fees to private equity funds. Those “rarefied” services include investments in groups that buy and sell whole companies in hopes of making lucrative profits.
Last year CalPERS’ former CEO even pled guilty to fraud and corruption charges for his role in funneling money to Wall Street insiders.
Despite this, columnist Michael Hiltzik somehow claims pension reformers are the ones serving Wall Street because of the allegedly higher management fees found in individual retirement account. But a recent Manhattan Institute study finds “no evidence” that defined benefit plans cost less than individual plans.
Naturally, individually-managed retirement accounts would also eliminate the possibility for such far-reaching fraud that plagued CalPERS in the early 2000s.
Hiltzik then follows a tried-and-true path to fight reform: Understate the payouts of retirees, downplay the negative impact rising pension costs have had, and pretend the costs of paying off defined benefit plans are a fatal flaw to reform.
How much are public retirees actually making?
First, it’s important to accurately state how much public retirees are making. Hiltzik claims that the average retiree in bankrupt Stockton received an annual pension of $24,000. However, pension payout data provided by CalPERS to TransparentCalifornia reveals an amount of $47,500. This includes employees who had worked less than one year and retired decades ago. Emails by this author seeking Hiltzik’s source for that erroneous figure went unanswered.
When union-backed officials retroactively enhanced pension benefit formulas in 1999, pension payouts soared: For employees with at least 30 years of service who retired before 2001, the average annualized 2013 payout was $54,259, while those who retired after 2001 received an average payout of $67,133, despite having received far fewer annual cost of living increases than their older counterparts.
Now, with the justification behind these increases—higher investment earnings would offset their cost—having been exposed as flawed, taxpayers are left holding the bag.
When pensions miss their investment targets, the cost is borne entirely by taxpayers.
This is why taxpayers are paying at least 2-3 times as much for public employees’ pensions than public employees themselves.
For example, California Highway Patrol officers contribute 11.5% of their pay towards pension costs, with taxpayers contributing a historical high rate of 46.7%, which will rise to 50% by 2019.
In other words, the retirement costs of 100 officers will be equal to the salaries of 50 more officers.
Growing pension contributions are also crowding out education spending. AB 1469, passed in 2014 by the California Legislature, mandates that schools increase their spending on retirement costs by over 125% from 2014 to 2020.
Without reform, costs would rise even more
With so much at stake, its unsurprising that the public pension industry funds an organization, the National Institute of Retirement Security (NIRS), to advocate on its behalf. One of NIRS’ main arguments, repeated by Hiltzik, is that “shutting down a pension plan actually costs taxpayers money” due to the loss of contributions from future employees.
Yet employees only pay half of the projected cost for their own, future benefit.
Precisely because taxpayers already bear the entire cost of paying down the unfunded liability, the “changing demographics” argument is invalid.
Further, NIRS cites financial disclosure rules that guide, but do not dictate, the time frame pension systems may use when structuring their debt payments. As University of Arkansas economist Bob Costrell found, “there’s nothing whatsoever preventing” governments from paying down their debts over the same time frame they’ve grown accustomed to.
This is why a recent Mercatus Center study concluded that, “While converting public pension plans won’t make their unfunded liabilities go away, it will prevent the liabilities from getting worse. Arguments for maintaining failing pension systems due to perceived transition costs are not based on empirical reality.”
Finally, Hiltzik cites three states that offered a 401(k)-style alternative and then experienced increased costs for their existing defined benefit plan. Left unsaid was that without reform, costs would have risen further.
If this is the best the public pension industry can offer in their defense, reform might just have a shot after all.
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