One sentence summary: Given CalPERS is underfunded by $75B it does not make sense to add more people into the broken CalPERs system.
Multi-sentence opinion: It does make sense if you need to draw money from fresh new participants to maintain the high benefits to previously retired and current members. This is similar to a Ponzi scheme. It is better for early entrants: the previously retired and current members. The alternative would be to cut their benefits or CalPERs expenses.
Something has got to give. The reinvestment rate assumption of 7.75% is not realistic. So what gives? Cut existing benefits? Take more risk to [hopefully] achieve 7.75%? Maintain existing benefits and cut those of newcomers (while still drawing the same amount from their checks)? Tough choices indeed.
What would I do? Several things simultaneously.
- Revise that 7.75% downward to something more reasonable, maybe 5%.
- Adjust existing and new pension plans so that the payouts are commensurate with the expected returns of 5%. That is, shared sacrifice.
- If returns turn out to be higher than the conservative expectation, pay out a bonus check equitably to members who contributed to the plan. That is, shared prosperity.
- Revisit the CalPERs cost structure. Any overly-generous contracts? Have we seen a divergence in the pay of the average CalPERs worker vs. top management?
I know these are high level suggestions needing further analysis. I just hope someone at a high level hears about this blog and considers the suggestions. Here is the article: