From the San Jose Mercury News, Sunday December 18:
If state Treasurer Bill Lockyer, union leaders and the state's largest government employee retirement funds have their way, they'll continue betting against the odds. It's not surprising. It's not their money at risk. They won't have to cover the losses. Taxpayers will.The temptation to spend Other People’s Money is irresistible, especially when you can legally bind others to spend the money in the future.
Last week, a study led by Joe Nation, a Stanford public policy professor and former Democratic assemblyman from Marin County, made explicitly clear the magnitude of the risk. He found that there's a better-than-even chance we're going to lose the wager.
The assumption about the investment returns is critical. The higher the expected return, the less money must be contributed now. But here's the kicker: If investments don't meet expectations, the employer -- the taxpayer -- must make up the entire shortfall. The employee has no risk.
So labor groups typically push for high return-rate assumptions. That means less pressure on workers and employers to kick in more now, and that frees up government funds to hire workers and pay for salaries and benefits. But unrealistically high assumptions mean we're shortchanging the system, creating a debt for future taxpayers.
Currently, the UC system uses an annual assumed rate of return of 7.5 percent, while CalPERS and CalSTRS use 7.75 percent. Defenders say those rates are based on past performance. Nation, like many academics, thinks they're irresponsible. Investment guru Warren Buffett has called them "crazy."
Nation, using CalPERS' own data going back as far as it would provide, 1982, ran statistical simulations to forecast the odds of meeting several investment targets. He found there was only a 42 percent chance of meeting or exceeding our current wager on the 7.75 percent rate.
Here's another way of thinking about it: Assuming future annual returns of 7.75 percent, the three pension systems combined were short $143 billion, or $11,703 for each California household. At a more realistic 6.2 percent investment assumption, they're short $291 billion, or $23,852 per household. Thus, the higher assumptions hide the magnitude of the problem.
Our system is supposed to provide checks and balances to prevent such problems. But public employees pay more attention to (and contribute more money to) state and local elections than do the average voter. An additional problem in California is that with 8 year term limits, many politicians don’t worry about tomorrow because they expect to be long gone (in Congress, a local mayorship, lobbying or private practice).