It is absolutely worthwhile to consider how to ensure that California's public pension systems remain on a sound footing and able to provide a secure retirement for public workers. But issues about the cost/benefit of public employee pensions have become a major point of contention in the heated debate on how to fix California's state budget problems. Pension-spiking poster children, manufactured data supposedly showing huge unfunded liabilities and false charges of labor intransigence have cast a dark cloud over public pensions.
For instance, a common claim is that pension costs will bankrupt state government. In fact, the entire costs of pensions for state workers in 2011 will be $3.5 billion, barely 4% out of an $85 billion budget. Add CalSTRS and the total is not even 6% of the budget. If we paid zero into public employee pensions and eliminated them altogether, we would not come close to solving the budget deficit.
In fact, the state of California pays less as a percentage of payroll for pensions today than it did in 1980. Meanwhile CalPERS has earned back more than $70 billion since the financial crisis and the system's funding status is estimated near 70 percent.
As to spiking, California's public worker unions and its pension system have supported curbs, backing strong legislation last year – unaccountably vetoed by Gov. Schwarzenegger – that would have virtually ended the practice.
Meanwhile, state employee unions went to the bargaining table – the best place in our view to work out pension changes — and negotiated agreements that significantly tightened the state's pension formula and doubled what workers will pay towards their own retirement. At the state level, these negotiated changes restored the old rule that pensions be calculated on the average of the highest three years' salary and doubled worker contributions to 10% of salary.
Meanwhile, on the spiking issue, we note that only some 2% of Cal PERS retirees and 2.2% of CalSTRS retirees have pensions above the poster child level of $100,000. The average CalPERS pension is about $25,000 per year. Half of CalPERS retirees receive pensions of $18,000 per year or less. Unlike the private sector, many public employees do not receive Social Security, making pensions their sole source of retirement income other than savings.
Another proposal – this one by the Little Hoover Commission – that would freeze future benefits for current workers alter and generally reduce future retirement benefits for current public works is unconstitutional and contravenes a substantial body of established law.
In a letter of response to the report, CalSTRS notes the Commisison, “cites no case in California in which a court has held that pension benefits payable to existing employees, even for future service, could be reduced without being accompanied by comparable new advantages.” Thus if adopted, such a recommendation would create a legal morass and a myriad of costly court battles while failing to provide any real benefit to the state budget.
Finally, and perhaps what should be of most concern to California's taxpayers, recommendations like those of the Little Hoover Commission recommendations – though supposedly aimed at repairing the state budget – would not provide any immediate cost savings, while adding significant new costs to create and administer the new plans it proposes.
One proposal, for instance, adding teachers and public safety workers to Social Security, would require a substantial increase in state funding. Another, shifting more of future pension savings to defined contribution 401(k)-like plans, would make those savings less secure while adding significant new program costs.
Our own recommendation? Continue working in good faith at the bargaining table for needed changes, focusing on the true issues and not those manufactured to make a political point. Meanwhile, in our view, the larger pension concern should be for the vast and growing majority of American workers with savings hardly a quarter of what is needed to retire in dignity.