Magazine Article

Pension reform needs to be done right
Rushing to do it “right now” will not get us to a better place

By Jonathan Karpf CFA Associate Vice President Lecturers, North/Anthropology, San Jose

FALL 2012 — The new rules signed into law in September on state workers pension plans—which do affect the CalPERS pension plan for the CSU faculty—come as a reaction to those who have loudly shouted that California needs pension “reform” now, now, now.

That demand to hurry up illustrates exactly what is wrong with the public debate on public employees’ retirements: critics scream for quick action and work to create hysteria but provide no tangible solutions.

Some of the provisions in the new law are reasonable changes that end actual abuses.

Some provisions establish better practices, like the one that requires consistent contributions in good times and bad, to smooth out the ups and downs in the plans’ investments over time.

Still, pension reform needs to be done right, not merely done fast.

That means taking the time to understand how to shape the state’s system so that it continues to work well for our state budget, for our workforce and for the overall economy.

The state Legislative Analyst’s Office agreed, saying in a report that:

“…with several thousand public employers and many different pension and retiree health packages offered to public employees, it is very difficult to fashion a workable, fair, sustainable set of legislative provisions …

“We strongly urge the Legislature to take several months to fashion a pension plan in response to the Governor’s proposals.”

The plan we now have in place was done fast. And we will have to sort out the consequences of that over time.

What do real reforms look like?

Real change means tackling issues such as abuses of the system and pension-spiking, which public employee labor unions in more than 240 cities, counties, and local districts had already done at the bargaining table.

After all, the vast majority of state workers never spiked their pension benefits and did not have the influence to do it even if they wanted to. It was mainly done by people in the upper ranks who had special connections to get a steep salary hike from their management just before retiring. Many unions agreed to contract provisions to prevent that.

The governor’s plan, now law, ends spiking across the board. Pension benefits will be based on an average of an employee’s last three years of work.

Some issues solved in collective bargaining

Before the governor’s plan became law, firefighters, police officers, garbage truck drivers and more already had voted to increase their own contributions toward their pensions, forego raises, and take on increased workloads.

Concessions at the state level, reached within collective bargaining over the last few years, have saved taxpayers $600 million.

CalPERS outperforms 401Ks & IRAs

Another real reform would be to take an honest look at the long-term performance of the California Public Employees Retirement System (CalPERS) compared with 401(k), IRA, and other hybrid proposals.

Over the past 20 years, CalPERS has shown an 8.4 percent annual positive interest rate— an incredible rate of return in any economy, but especially this one.

Meanwhile, the kind of 401(k)s and IRAs that Wall Street would like average Americans to rely on lost 32 percent of their value between 2007 and 2008. That is a loss of nearly $3 trillion.

Instead of setting off false alarm bells with short-term snapshots of a pension funds’ performance, lawmakers in California ought to follow the U.S. Congress’s example of allowing private corporations to calculate
their pension contributions by using pension formula for newly hired employees with a requirement to work longer to reach full retirement age and a cap on the amount used to calculate an individual’s pension.

Our public employees’ retirements are a complex and significant economic driver that require careful consideration and thoughtful solutions, not Chicken Littlestyle calls to “go all the way”—whatever that means.