February 26, 2013


California's sad pension saga (Steven Malanga, February 24, 2013, LA Times)

[C]alifornia set its initial retirement age for state workers (and, beginning in 1939, for local government employees) at 65, at a time when the average 20-year-old entering the workforce could expect to live for another 46 years, until age 66. The system's first pensions were modest, though far from miserly. An employee's pension equaled 1.43% of his average salary over his last five years on the job, multiplied by the total number of years he had worked. That formula typically provided longtime workers with pensions equal to half or more of their final salaries.

The pensions were funded by three sources: contributions from employers (that is, state and local governments); contributions from employees (though some governments opted to cover that expense); and money that the pension fund would gain by investing those contributions. With the 1929 stock market crash in mind, California opted for a cautious investment approach.

"An unsound system," the 1929 commission warned, would be "worse than none." The employees' contributions were fixed, so if investment returns weren't sufficient to fund the promised pensions, the employers' contributions would have to increase to make up the difference.

In the decades since, that cautious approach has been virtually abandoned as public employee unions have taken control of the system. The retirement age has been lowered, benefits have been increased and investments have become far riskier.

The major changes began in the late '60s, during a time of rapidly growing public-sector union power. 

Not coincidentally, reform requires returning retirement age closer to life expectancy, increasing personal contribution and boosting the rate of return, by using personal accounts to exploit the rate of return available in the market,.

Posted by at February 26, 2013 11:54 AM

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