California’s Pension Tsunami Swells as Pension Benefits Surge

The California Public Employees’ Retirement System (CalPERS) is the nation’s largest public pension fund. It also has massive unfunded liabilities, as much as $290 billion depending on the calculation method. Many are quick to blame the Great Recession and its low investment returns for the unfunded debts. But new data uncovered by the Sacramento Bee reveals extravagant pension increases approved more than a decade ago are coming home to roost.

The Sacramento Bee analyzed data from CalPERS’ internal annual reports, obtained through a California Public Records Act request, and found the average first-month pension payout for new retirees doubled between 1999 and 2012 to $3,025. But benefits grew much faster for certain occupational groups.

The average first-month pensions to state police and firefighters nearly tripled from $1,770 to $4,978. California Highway Patrol officers’ first-month retirement payments more than doubled from $3,633 to $7,418, and local government safety employees’ pensions went from $3,296 to $6,867.

Pension benefits surged for two reasons. First, California lawmakers sweetened pension-calculation formulas during the late 1990s and early 2000s, such as 1999’s Senate Bill 400 that allowed government agencies to retroactively increase pension formulas for employees.

Second, pension formulas use each worker’s compensation during his or her last few years on the job. With salary growth over time, the sweetened formulas exaggerated the impact of pay raises on future pension benefits.

Now we’re living with the aftermath as these higher benefits roll through the pension system like a tsunami. The sudden and massive surge in retirement benefits won’t die anytime soon either because of the nature of pension accounting and demographics.

Long before the Great Recession, lawmakers made changes to California’s public pensions that were fiscally irresponsible—and this is key—by making the line between a sustainable pension system and an unsustainable pension system razor thin with no margin for error. Now we’re living on the unsustainable side and it’s not pretty.

As for the politicians who fluffed up the pension system, most have long ago termed out of office, sticking us with the bill.

Lawrence J. McQuillan is a Senior Fellow and Director of the Center on Entrepreneurial Innovation at the Independent Institute. He is the author of the Independent book, California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis.
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