This slide show was developed in 2006 and
presented at several meetings of
constituents. In the face of renewed
attacked on public employee benefits,
most of the content remains relevant
today.
7/1/2006
1
The California Faculty Association presents…
George Diehr
Stand up
to the
Pension
Privatization
Gamble
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2
What is CalPERS?
A group plan that serves us by
managing:
• Our health insurance
• Our secure retirement program
• Investments of our pension money
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CalPERS
is a
healthy
retirement
system.
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The CalPERS Board of
Administration Sets Policy
13 members:
6 elected by CalPERS members
2 appointed by the governor
1 appointed by the legislature
4 ExOficio by virtue of their state office
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Retirement security
is part of how we
are paid in return
for our service to
California.
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Three-pronged attack
•
•
•
7/1/2006
2005/06 budget proposal
Bill in legislature: ACA 5
Ballot initiative
8
These
attacks would…
• End retirement security for
new employees
• Increase paycheck
deductions for all employees
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The claim that pension
costs for the state are
exploding and impossible
to sustain
is a myth.
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CalPERS’ Current Funded Ratio is Not Unusual
Current ratio is 84% and climbing.
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Figure 1
State Pension Contributions, Millions $
The Critics' Myopic View
$3,000
$2,500
$2,000
San Diego Union-Tribune headline:
“State’s CalPERS payment surges 18fold in 3 years.”
2,564
2,213
$1,500
1,190
$1,000
677
$500
160
157
'99-00
'00-01
$0
'01-02
'02-03
'03-04
'04-05
In his State of the State address, Schwarzenegger said the state’s pension system is “another financial train on
another track to disaster.” The state’s pension contributions have soared to $2.6 billion from $160 million in just
four years, he noted.
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Figure 3
State Contribution Liability and Cumulative
Reserve with Fixed Contribution Rate
$5,000
$4,500
$4,000
$3,500
If the state contribution had continued to
grow at a 6% rate and earn 5% interest,
the cumulative savings would amount to
over $4.4 billion at the end of 2004/05.
$3,000
2,564
$2,500
2,213
State contribution at 6% annual increase.
$2,000
$1,500
1,120
1,236
1,223
$1,000
1,190
766
$500
677
160
157
$0
'95-96
7/1/2006
'96-97
'97-98
'98-99
'99-00
'00-01
'01-02
'02-03
'03-04
'04-05
13
Current Rates are High, But Not Unprecedented
State Contribution Rates
20%
Contribution % of Salary
18%
Tier 1
16%
Schools
14%
12%
10%
8%
6%
4%
2%
2003-04
2001-02
1999-00
1997-98
1995-96
1993-94
1991-92
1989-90
1987-88
1985-86
1983-84
1981-82
1979-80
0%
Fiscal Year
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Historical Rates with Proposed Stabilization
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These attacks on public
retirement systems
could cause a pay cut
for employees
of as much as 6%.
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The Budget Proposal would
freeze the state’s share of
payments for
health insurance premiums.
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Plus, the bill and ballot
initiative would end
death & disability benefits
for all employees
and their families.
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The essence of all the attacks:
Who bears the risk?
Tom Campbell, Gov’s Director of Finance
“The fundamental goal is that
employees, not taxpayers, bear
market risk.”
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DB versus DC
(Defined Benefit vs. Defined
Contribution)
First they come for the new
hires…later it will be the rest of us.
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Defined Benefits (DB) =
Traditional Pension System
• The retirement benefit is
guaranteed for life
• Risks are spread out over time
• Risk is shared and underwritten
by the employer
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More features of Defined
Benefits (DB) system…
•
•
•
•
•
•
•
Employees make fixed contributions
Employer contributions vary
Benefits & contribution rates are usually negotiated
Employees & employer share management costs
Money is managed in a pool to reduce overhead
Some (CalPERS) give death/disability benefits
Benefit increases protect against inflation
CalPERS benefits go up 2% a year
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Defined Contributions (DC) =
Individual Risk Plan
• Benefits end when the individual’s money
runs out
• Benefits depend on success of individual
investments both during employment and
retirement
• The individual alone bears all risk
• Management cost shifts to the individual alone
• No death, disability or survivor benefits
• No no protection against inflation
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“You’re putting so much risk of the stock market onto
each individual person, they become in danger of losing
retirement protections” — Art Pulaski, California Labor Federation
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Administrative costs
DB plan (CalPERS) = 0.18%
DC plan (typical 401k) = 1%+
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To get the same benefits with
a DC plan that a typical
CalPERS member now gets,
you would have to pay in
much more.
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Handout
Example CalPERS Pension Benefit
Common plan: “State Miscellaneous, 2% at age 55”
Formula: Yrs * Age Factor * (Highest Salary - $133)
• Assume 30 years of service, age 63 at retirement and
final salary of $5,000 per month.
• “Unmodified” retirement benefit is almost 75% (=30
years times age factor of 2.5%) of final salary.
• Pension = 75% * ($5,000 - $133) = $3,650.
• + 2% per year increase for inflation.
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Handout
“Equivalent” Defined Contribution Plan
Under optimistic assumptions, what percent of salary must
be saved to purchase an annuity equivalent to the DB
pension of $3,650/month?
• Assume: starting salary $1,157, increasing 5%/year for
30 years (=$5,000); 8% investment return.
• 22-year life expectancy at age 63 (IRS standard, male).
• Need fund of $600,000 at retirement; return of 4.8%. See
http://www.totalreturnannuities.com/
• Requires contribution of over 21% of salary.
AND: no benefit to survivor, no inflation protection, no death
or disability benefit.
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The average monthly benefit
paid to a retiree from public
service in California is
$1,669.
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It isn’t broken.
So why fix it?
Privatizing pensions will not help
the state with the budget crisis.
No short-term savings.
Likely none in the long term either.
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“There’s an old saying, so goes California, so goes
the rest of the nation. That’s exactly what they’re
worried about. You talk about pensions. What do
you think, it’s just about California? No. If
California’s pension system goes, now it will go
like an avalanche.” – Gov. Arnold Schwarzenegger
Orange County Register
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R
Mike Peters, Dayton Daily News Kings Features Syndicate
“This is the California version of Social Security privatization.”
– Carol Wills, California Professional Firefighters
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Consider the Source
http://www.sourcewatch.org/wiki.phtml?title=Grover_Norquist
'The goal is to reduce the size and
scope of government in half over the
next 25 years,’
....Norquist and the White House are
so close that it is sometimes difficult
to discern who is influencing whom.
But such Bush initiatives as
privatizing Social Security,…bear all
the marks of Norquist's thinking. – Jill
Zuckman, Orlando Sentinel, June 15, 2003, “Conservative
operative is in the right place at the right time”
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Summary
 Retirement security is
part of total comp.
 Eliminating the DB
pension will leave many
employees with no safety
net.
 CalPERS is not in
trouble.
 DB pensions are not
bankrupting public
agencies.
 A DC plan is unlikely to
save taxpayers money
even in the long-run.
 The larger crusade is to
dramatically reduce
public services.
 CalPERS plays a crucial
role in corporate
governance: it benefits all
investors.
Arnold’s “retreat” is strategic.
He will be back.
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Be Informed. Get Involved.
Resources & Contacts:
George Diehr: gdiehr@csusm.edu
CFA: www.calfac.org
CalPERS: www.calpers.gov
AFL-CIO Center for Working Capital:
RetirementSecurity.info
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