One Club Taxpayers Will Never Be Able to Afford

California’s $100,000 Club has grown to an all-time high. And it’s not a particularly exclusive institution. This one has more than 61,000 members, all of them retired government employees, raking in pension benefits many in the private sector would envy.

The membership drive was boosted by a sharp increase from the rolls of the California Public Employees’ Retirement System. It’s share of the $100,000 Club swelled by nearly two-thirds over four years. Earlier this month, Transparent California reported that last year, 22,826 CalPERS retirees earned “pensions of over $100,000 — a 63 percent increase since 2012.”

The retirement system made 646,843 individual payments adding up to more than $20 billion in 2016. Some of the amounts are rather astonishing. The top CalPERS pensioner is paid a whopping $390,00 a year.

Transparent California Research Director Robert Fellner says that in total, 61,198 retired California public employees have pensions that exceed $100,000 a year. This includes retirees from CalSTRS, the California State Teachers Retirement System; and other government retirement programs such as LACERA, the Los Angeles County Employees Retirement Association, the largest country retirement system in the country; and UCRS, the University of California Retirement System.

In all, pensioners are due nearly $1 trillion, according to the Stanford Institute for Economic Policy Research’s California Pension Tracker. That’s almost $77,000 of public employee pension debt per California household. Pacific Research Institute fellow Wayne Winegarden says somewhere between $300 billion and $600 billion of those obligations have no funding. In part, this is because California has for years failed to devote “enough money to fully fund its state-run defined-benefit system,” Winegarden says. The dollars that were supposed to be set aside are funded by state and local revenues – taxpayers’ dollars – and employee contributions.

Public employee pensions are also funded by returns from investments made using employee contributions. But some investments have suffered from money managers’ poor decisions. CalPERS, for instance, has lost “hundreds of millions of dollars,” according City Journal’s Steven Malanga, by pouring money into “socially responsible” investments. The board that operates CalPERS, one of the biggest shareholders in America, is following a “political agenda” and in doing so has often failed to meet “its fiduciary responsibility to invest the fund’s money wisely,” Malanga writes.

Economist Diana Furchtgott-Roth, director of Economics21 at the Manhattan Institute, has noted that the CalPERS’ 2014 report “Towards Sustainable Investment & Operations: Making Progress,” even boasts of its environmental, social, and governance investment strategy. The headline of her commentary – “There’s Nothing ‘Socially Responsible’ About Low Pension Returns” – nicely sums up the problem.

California pension systems have also lost money by exiting investments in industries, such as coal and firearms, that have been declared politically incorrect. CalPERS alone lost $3 billion “of potential investment gains over 15 years,” after it divested its tobacco stocks, Reuters reported last year.

So thanks to generous payouts to retirees, governments that haven’t dedicated enough dollars to the system, and a revenue stream that has been hijacked by a political agenda and can’t produce adequate income, the public employee pension system has reached a crisis stage. Who is going to fund the shortfall?

Taxpayers are already responsible for about 40 percent of public employee pensions, U.S. Census Bureau data indicate, with one judge’s pension fund receiving 98 percent of its dollars from government, the San Diego Tribune reports. Roughly 45 percent is generated by investments while the employees themselves contribute only the remaining 15 percent. Those first and last figures need to be flipped. Taxpayers shouldn’t be responsible for such an inequitable share of public employee pensions.

These figures dramatically show that California’s pension system is unsustainable and must be reformed. Token reforms proposed by Governor Brown were enacted into law a few years back. While those are a step in the right direction, they are only a drop in the bucket of what must be done.

We can start by placing all new public employees into defined-contribution plans, in which workers, and in some cases employers, as well, pay into a retirement fund. The defined-benefits program, that provides retirees with a pre-determined amount no matter how much they’ve contributed and no matter how the economy and markets are performing, should be frozen for current public employees. They could be offered a lump sum equal to the value of their benefits that would be placed in what Winegarden calls “an appropriate retirement account,” or they could stay in the defined-benefit program that’s been reformed to reduce taxpayers’ risk.

Defined-benefits have put California on the brink. The private sector saw how financially destructive they were and moved away from them. The same should be expected from the public sector.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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