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The coming depression blog | July 21, 2018

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California’s Public Pension Disaster

California has promised its public employees lavish pensions and retiree health benefits without setting aside nearly enough money to pay for those benefits. As a result, California already admits to a $75.5 billion shortfall in paying for these promises to public employees—$40.5 billion for the teachers’ retirement plan (California State Teachers’ Retirement System, or CalSTRS) and $35 billion for the California Public Employee Retirement System (CalPERS).

As the pension and health-care benefit crisis sweeps across the nation, some states are seriously dealing with these multibillion-dollar problems that threaten public services and treasuries. And other states remain in deep denial. California, to no one’s surprise, is moving stridently in the wrong direction. That continues a troubling trend that’s been building for years, one that has had a particularly harsh effect on black workers. While the private sector has been adding jobs since the end of 2009, more than half a million government positions have been lost since the recession.

A new estimate from the state’s public retirement system shows a change in benefits could prove costly.

Earlier this fall, lawmakers asked the retirement system to run some numbers.

They wanted to know how much it would cost employers- that are the state, cities and towns – if New Hampshire went from a defined benefit plan to a defined contribution plan.

Going from a system where the employers are responsible for guaranteed benefits, to one where employers only guarantee they pay a certain contribution.

Initial numbers from the retirement system’s actuarial firm are sobering.

Over the next 26 years, the switch would end up costing employers at least $237 million dollars more than they currently expect to pay.

The tiny state of Rhode Island, for instance, faced enormous pension liabilities. Its state system was about 40 percent funded and on the brink of collapse. The Legislature and governor last month reformed the pension system by shifting to a hybrid pension plan (rather than a pure defined-benefit plan), suspended cost-of-living raises for retirees and boosted the retirement age. The reforms reduced benefits for current employees.

This shortfall has grown so large because elected officials preferred the hidden cost of higher retirement benefits to the visible cost of higher wages. For instance, a recent report from the Reason Foundation noted that thanks to a 1999 pension bill radically increasing benefits, “there are 9,111 state and local government retirees in California, such as police officers, firefighters and prison guards, who receive pensions of at least $100,000 a year (through CalPERS), and an additional 3,065 retired teachers and school administrators who receive pensions of over $100,000 a year (through CalSTRS).” As a California pension recipient told Forbes last year, “It’s just taxpayers’ money, so nobody cares.”

But even in California, it has long been accepted that non-vested benefits, which are non-contractual and not guaranteed, can be changed. There’s no long-term promise inherent in such benefits. Typically, government retiree medical benefits fit into this category. Virtually no retiree in the private sector gets these deluxe health-care freebies because they are so expensive they would eventually destroy any company stupid enough to grant them.

California politicians can either continue hiding their heads in the sand, or else face up to these looming obligations by ceasing to promise overly lavish benefits and by increasing the required contributions from salaried employees. In addition, California may consider changing the structure of its pension system so that it depends more on employee savings, rather than promising a guaranteed financial payment regardless of how much a given employee saved.

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