March 14, 2012

CalPERS Rate Reductions Ignore Reality, Fail To Solve Problem

Eileen Norcross

Senior Research Fellow
Summary

Today the California Public Employees' Retirement System (CalPERS) board will vote to approve reducing their discount rate, from 7.75 percent to 7.25 percent. Unfortunately, it will not come close to solving California’s pension problem, said Mercatus scholar Eileen Norcross.

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Today the California Public Employees' Retirement System (CalPERS) board will vote to approve reducing their discount rate, from 7.75 percent to 7.25 percent. Unfortunately, it will not come close to solving California’s pension problem.

Economists have shown California’s pension problem is closer to $500 billion, more than three times the size reported. Estimating pension liabilities isn’t about cherry-picking numbers, but instead about how to accurately value pension liabilities which are guaranteed by the state of California. They should be considered safe and risk-free instead of risky investments.

By lowering their discount rate a mere half point, CalPERS demonstrates it still does not understand the problem--the need to properly account for benefits. The math is unforgiving, and refusal means California cannot afford reality.

 Lowering the discount rate is not easy for a government to manage, but the current bill is too large to be addressed solely by future benefit cut. Currently, the government contributes $19.5 billion to the pension system, but to be fully funded would require a $47.8 billion contribution—which is equivalent to $1,994 per household.