US. California’s immense pension dilemma
California’s public employee pension dilemma boils down to this: The California Public Employees Retirement System has scarcely two-thirds of the money it needs to pay benefits that state and local governments have promised their workers.
Moreover, CalPERS’ official estimate that it is 70.8% funded is based on an assumption of future investment earnings averaging 7% a year, which probably is at least one or two percentage points too high. In the 2019-20 fiscal year that ended June 30, CalPERS posted a 4.7% return and over the last 20 years it has averaged 5.5% by its own calculation.
Were the earnings assumption dropped to a more realistic level, the system’s “unfunded liability” — essentially a multi-billion-dollar debt — would increase sharply from the current $160 billion to at least $200 billion.
There are three ways to resolve the debt dilemma: Earn higher returns, require government employers and employees to pay more, or reduce future benefits. CalPERS is pursuing the first two but a recent state Supreme Court ruling makes the third virtually impossible.
The court had an opportunity to revisit the “California rule” — an assumption, based on past rulings, that once promised, future pension benefits cannot be revised downward.
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