Novembe 17, 2015
Experts have warned for years that the state’s largest public pension plan has overestimated how much its investments will earn, leaving taxpayers to pay billions of dollars more than expected.
Now the board of the California Public Employees’ Retirement System is reconsidering. As soon as Wednesday, the fund’s board could approve a plan that would slowly reduce to 6.5% the current 7.5% it says it expects to earn on its investments.
For taxpayers, that seemingly small change is significant.
Consider the average California Highway Patrol officer who now earns $105,000. Taxpayers currently contribute $47,000 a year for that officer’s pension.
If calculated using an expected investment return of 6.5% instead, according to CalPERS documents, the taxpayer contribution would be $68,000 — an increase of more than 40%.
“It has understated pension debt dramatically,” said Joe Nation, a professor at Stanford’s Institute for Economic Policy Research, of CalPERS’ current estimate. “They’ve been able to convince a lot of people things are OK when they aren’t.”
Nothing will happen immediately. The pension agency’s staff says it has designed the plan to soften the blow.
If the board approves the plan as expected, payment calculations won’t change significantly for years, the staff says.
Under the proposal, the rate would be reduced slowly by tiny increments. Getting to 6.5% could take 20 years.
Many experts believe that even the 6.5% estimate is too optimistic.
The average corporate pension plan now uses a rate of 4% to determine how much money needs to be contributed, according to a recent study by Milliman, a consulting firm.
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