Skip to comments.Schwarzenegger Aims at State Pension System
Posted on 01/23/2005 11:22:27 AM PST by calcowgirl
LOS ANGELES, Jan. 22 - Gov. Arnold Schwarzenegger, echoing language used by those who claim Social Security is headed for a crisis, contends that California can no longer afford a generous traditional pension plan for state employees and teachers and should force all new workers into a 401(k)-style plan of private accounts.
California's $300 billion pension system for its public employees is the largest state system in the nation and as early as this summer, Californians will be asked to vote on the proposed changes. The change that Mr. Schwarzenegger has endorsed is supported by a number of Republican state lawmakers and is driven by the same ideology behind the effort to transform Social Security.
The outcome of the vote in California, pension experts and political analysts say, will not only have an impact on the state pension system, but will also provide an important marker of public opinion on proposed changes to Social Security.
Mr. Schwarzenegger, in his State of the State address earlier this month, described California's pension system as "another government program out of control," careering toward fiscal ruin. He cited the state's obligation to inject $2.6 billion into the system this year to keep it actuarially sound, compared with $160 million four years ago.
The impetus for Mr. Schwarzenegger's plan comes from some of the same antitax advocates, free-market enthusiasts and Wall Street interests pushing President Bush's Social Security initiative. Grover Norquist, the president of Americans for Tax Reform, a Washington lobbying and research group, has endorsed the plan. The Howard Jarvis Taxpayers Association, in California, is sponsoring a similar measure. The Jarvis group plans to put its proposal on a statewide ballot if the State Legislature does not act on the governor's plan.
Although Social Security and the California pension plans have important differences and different long-term challenges, the proposed solution - private accounts managed by individual workers with a predetermined contribution by employers - is basically the same.
"They certainly are kissing sisters," said Stephen Moore, the former director of the conservative Club for Growth who is now the president of a political action committee, the Free Enterprise Fund, which is dedicated to remaking Social Security. "These are proposals that aim toward giving people real ownership and a real stake in how the economy and the stock market perform."
Mr. Moore, who has advised Mr. Schwarzenegger on economic policy and participated in an independent audit of state finances last year, said that California tends to lead the nation on social policy. If California moves from a traditional defined-benefit pension plan to a 401(k)-style defined contribution plan, the nation is likely to follow, he said.
The proposal would affect the California Public Employees Retirement System, known as Calpers, which handles the accounts of 1.4 million state and municipal workers and retirees. It has $178 billion in assets and is one of the largest pools of investment capital in the world. The proposal would also cover the California State Teachers' Retirement System, with 750,000 members and $116 billion in assets.
Although Mr. Schwarzenegger described the plans as a looming train wreck, even advocates of privatization in his own administration say the system is currently sound. The plans, taken together, are nearly 90 percent funded, a level that most experts consider quite healthy.
"We're not warning of imminent collapse," said Tom Campbell, an economist and former member of Congress who is the state's new budget director. "There is a potential danger for the state to have a defined benefit system, and to the extent we can move away from it, as many private employers in America have done, we should do that."
The danger, as Mr. Campbell and others describe it, is found in the vagaries of the stock market and the tendency of the State Legislature to award generous new retirement benefits in flush times. Unlike Social Security benefits, which can be changed by act of Congress, benefits granted to recipients of public pensions, at least in California, are virtually untouchable.
Opponents of the plan, who include almost all Democrats in the Legislature, state employee unions and the trustees of the pension plans themselves, say that the plans have been well managed and provide a critical source of income security to workers who sacrifice pay in their working years to toil in the public sector.
The state contribution to the system this year is large because of a downturn in the market, not because of extravagant benefits paid to retirees, they said. The state has benefited in the past from a strong stock market and in some years has had to make no payments into the funds.
"Calpers investments have generated $173 billion over the last 20 years," said Patricia K. Macht, a spokeswoman for the fund. "Why would anyone want to throw away the chance to add another $173 billion over the next 20 years? People see this as an opportunity to use a temporary downturn to drive a stake into the heart of a well-funded system."
Some opponents of privatization also detect a subtler agenda among those pushing private accounts - to silence the voice of workers and their pension fund managers, who oversee some of the largest institutional investment accounts in the nation.
Calpers has been a leader in an effort to bring greater accountability to corporate boardrooms. It pulled its money out of tobacco companies in the 1990's, voted its shares against Michael Eisner, chairman of The Walt Disney Company and leaned on the Philippines to do more to protect worker health and safety.
Critics say the role of pension funds is to safeguard their members' money, not make social policy.
"There is an overriding issue of what happens when you have these superlarge retirement systems straying from bottom line of the benefit of members and straying into corporate governance, even social engineering," said Jon Coupal, president of the Howard Jarvis Taxpayers Association. "A motivation for us, as you move to a system of individual accounts, is that over time you will depoliticize the retirement system in the state of California."
Supporters of Calpers and other traditional public pension plans intend to vigorously contest an overhaul and say they expect a costly battle if the plan makes the ballot.
Richard C. Ferlauto, director of pension investment policy for the American Federation of State, County and Municipal Employees, said that Mr. Schwarzenegger and others were manufacturing a crisis to justify sweeping changes to the retirement systems that millions of workers rely on and to throttle the influence the workers wield through their pension plan investments.
"The debate around private accounts will be fought in California before the outcome of the Social Security debate is determined," Mr. Ferlauto said. "The attempt in California is the stalking horse for whether private accounts can be sold to the American public.
AND, it should aggressively privatize all possible work to start clearing out some of its existing personnel. That would go a long way toward reducing some of the costs it incurred when it started becoming overly generous with its pensions.
This article brings up some interesting figures. It talks about the contribution going from $160 million 4 years ago to $2.6 billion today. The $160 million coincides with the period when most all investment funds reaped the rewards of the (temporary) stock market boom, so one can assume it is artifically low. What are the contributions for other years? Or, what was the contribution prior to the dot.com boom?
I've been looking for a number that represents the active number of employees under this plan (excluding retirees). One article used a figure of 326,000. If that is accurate, at $2.6 billion the contribution per person, per year, is approximately $8,000. That appears a bit high compared to private industry, but not extreme if making up for prior year losses.
Similarly, $160 million (the number Arnold uses to compare to) would have required a contribution of less than $500 per person, per year. This amount had to be artificially low.
I think the benefits need to be cut back, particularly to the law enforcement employees. But this move to change to a 401K-style is not addressing the issues at hand.
Democrats fight these changes, including partial privatization of SS, for the same reason the Islamists fight democracy. It empowers the individual and de-powers the state. Independence then starts to spread and state control starts to shrink.
I think the Republican party needs to be careful about this issue or it could find itself pushed out of office, as happened the last time retirement systems were attacked. Historically it has been a no go arena because of the backlash it creates.
People get touchy when you mess with their retirement, especially after certain promises were made.
Support this stuff if you will, but I think it's going to bite us in the end.
An opinion piece again!!!!!!!
Well....the Progressives are going to circle the Wagons on this one.........
The problem with these types of issues is that it doesn't gain a majority of support even within the party that proposes it.
And the whole thing makes me personally suspicious - it smells wrong. Someone wants to get money, and someone wants to break the power of the lobby. CalPers is pretty effective at getting whatever they want, including in the boardroom.
But, are my interests best served by supporting those who have an agenda other than an effective retirement system?
We have grown a government the size of which We can ill afford to now ask to 'save us' from ourselves.
I don't see how anyone who dishes up the SOS decade after decade can be called progressive.
California Public Employees Retirement System
The Myths and Realities of Defined Benefit and Defined Contribution Plans
A Defined Contribution Plan Would Not Solve The States Fiscal Problems
Costs of the current defined benefit plan wont go away. The State will have to pay for the start-up cost of the new defined contribution (DC) plan and still have to fund the current defined benefit (DB) plan. The State would also have to pay for death and disability benefit programs and social security for employees not offered under defined contribution plans. If defined contribution proceeds fall short of basic retirement income needed, the State will end up paying more in public assistance when employees are old, ill and infirm.
Defined Contribution Plans Dont Cost Less, They Cost More
Dollar for dollar, defined contribution plans cost more. Costs to administer a defined benefit plan is less than 2/10 of one percent or 18 cents per $100 invested, compared to as much as 2 percent of assets or $1.35 cents per $100 invested in a defined contribution plan.
Defined Contribution Plans Threaten Employee Retirement Security
Retirement benefits in a defined contribution plan are riskier. Employees would be asked to roll the dice and there is a high chance that the benefits would be inadequate. Employees could outlive their retirement assets in a DC plan. DC plans do not factor in inflation protection, or have disability and death benefits. Employees take all the risk in defined contribution plans. The state of Nebraska terminated their defined contribution plan after studies showed inferior returns -- 4 percent compared to 6-7 percent under a defined contribution plan -- and poor active participation by employers.
Defined Contribution Plans Will Cause A Deterioration in Public Service and Will Hamper Recruitment Retention and Make the State Attract Less Capable, Not More Capable Work Force
Defined benefit plans help recruit skilled and talented workers. Retirement makes up for lower wages than in the private sector. Defined contribution plans would encourage older, more expensive workers to work longer, rather than retire. Market timing would determine retirement trends, not age. The State has a hard time recruiting scientist, doctors, nurses, information technology workers, accountants and other classes of workers. This will make it worse.
Eliminating The Public Pension Systems Would Cripple an Enormous Economic Engine for California.
CalPERS invests more than $19.7 billion in California. The investment helps to build thousands of homes in California, create jobs, services, and revitalize urban neighborhoods. CalPERS invests $10.7 billion in California based companies from blue chip corporations on the New York Stock Exchange to start-up firms in south central Los Angeles and the Silicon Valley. Capital to finance corporate growth would dry up. CalPERS holds $2.4 billion in fixed income investments, including corporate bonds, that enable corporate expansion. CalPERS invests $6.4 billion in real estate, including senior housing, urban redevelopment and quality retail centers. CalPERS is also one of the largest real estate developers, financing more than $2 billion worth of single family homes. These pension dollars have financed the building of more than 43,000 homes, developed 33,000 lots for single family homes, and provided $13.8 billion in mortgages for nearly 100,000 California families.
The Plan Will Help and Hurt the Wrong People.
Wall Street firms make money even when members lose in DC plan. Many people would rather have investment managers within public service manage the assets rather than mutual funds whose goal is to make profits for itself. DC plans prevent participation in the full range of investments such as real estate and private equity investments, which is important to have in a sound diversified portfolio.
>>But, are my interests best served by supporting those who have an agenda other than an effective retirement system?
Excellent point. To me, this takes some power from Calpers, moves it to Wall Street, and still doesn't solve the known problem that the State is handing out benefits far in excess of the public sector.
How is this any better for the taxpayer?
How can you say a 401k style plan doesn't address benefit levels? The whole point of defined benefit plans, e.g. calpers, is that benefits are fixed while we have no idea where the money comes from--thus the crisis.
The whole point of a 401k is, it is what it is. You can blow it all in a day, you can portion it out over a time period, but when it's gone, it's gone. By definition, defined contribution plans address benefit levels. They equal your contributions, plus whatever investment returns your contributions earn.
How much is contributed to a DBP plan today is based on what the benefit level will be at retirement. Similarly, a 401K style plan, will initially establish an amount to be contributed based on an assumption of what it will generate at retirement. Have you seen any information or discussion of reducing the amounts contributed in a 401K style plan? I haven't.
A 401K style plan can be just as costly to the State, and could cost more. While it limits the risk to the State of increased contributions due to poor investment decisions (and shifts the risk to the individual), it also doesn't allow the State to benefit from good investments thereby lowering the cost to taxpayers.
The whole point of defined benefit plans, e.g. calpers, is that benefits are fixed while we have no idea where the money comes from--thus the crisis.
If you read the article, it shows there isn't a crisis. It is 90% funded and considered "healthy". What appears as a crisis, is the contribution amount increasing from $160M to $2.6B in 4 years. As I pointed out in my post above, this makes no sense. The $160M has to be an anomaly.
The whole point of a 401k is, it is what it is. You can blow it all in a day, you can portion it out over a time period, but when it's gone, it's gone.
Yep. And then what? I'm sure our great socialist state will be prepared to pick up the ball through more safety-net programs for the poor schmuck who ran out of money (all at taxpayer expense, of course).
By definition, defined contribution plans address benefit levels. They equal your contributions, plus whatever investment returns your contributions earn.
The real question is: What will be the state's contribution to this plan? Will those contributions be more or less than a defined contribution system (over a long term period)? Taking into account the additional cost to maintain individual investment accounts for every employee and retiree, what will be the net cost savings/growth under a 401(K) plan?
The devil is in the details. In summmary, my point is that changing to a 401K plan, by itself, does not necessarily solve the problems. I want more details.
Thanks for the reply. I forgot about this thread! lol
FYI, I've seen subsequent reporting that says this proposal will indeed cost more in the short term and that any savings would not be evident for 15 to 20 years. IMO, there has to be a better plan.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.