The state’s largest public pension plan has been suspected of wildly overestimating how much money their investments would earn, which would put the pressure on taxpayers to make up the difference. And now that fear has come true.
The California Public Employees’ Retirement System, or CalPERS, is reconsidering and restrategizing, and state taxpayers will likely be the ones to cover the costs of their mistake. This week, the board could potentially approve a plan that would lower their earlier estimate of 7.5% earnings on investments to just 6.5% gradually over a period of time.
It’s not much of a jump, but to the taxpayers it’ll be a significant (and costly) leap.
This change to CalPERS’ plan means that if your salary is around $100,000, then at the current CalPERS rate of 7.5%, taxpayers are paying about $47,000 for your pension fund. But with the lowered CalPERS rate of 6.5%, taxpayers will start having to pay about $68,000. That’s more than a 40% increase for taxpayers.
CalPERS has designed their plan to work gradually enough to make less jarring to taxpayers, but the issue that raises anger from California residents is the gross overestimation of earnings that the group claimed for too long.
“They’ve been able to convince a lot of people things are OK when they aren’t,” said a professor at Stanford’s Institute for Policy Research, Joe Nation. “[CalPERS] has understated pension debt dramatically.”
The change to the estimations won’t happen in any noticeable way for years. It’s designed to make the transition slowly to acclimate taxpayers to footing the bill for pension costs. It could take up to 20 years to reach the new estimate of 6.5%. Some experts even believe that the new estimate of 6.5% is overly optimistic, and that CalPERS is trying to make their miscalculations seem less pronounced.
This shift in CalPERS’ plans could signal similar changes to be made to government pension plans around the U.S. CalPERS is the largest pension plan of its kind, covering more than 1.7 million employees and retirees of the California government, and other groups have looked to it as a financial barometer, and will likely follow suit in readjusting their estimated earnings.
While the shift is less than good news, experts agree it’s better for CalPERS and similar plans to announce these more-accurate estimates rather than continuing to misinform taxpayers about the realistic costs of pensions in the U.S.
At this moment, CalPERS estimates that they’re about $117 billion in debt for pensions that are already owed to the government employees they cover in the state of California. That debt amount could dip even further to $178 billion owed with the new estimation rate of 6.5%.
In response to the increasing costs paid to CalPERS, California government agencies have already begun to lay off government workers like highway patrol officers and are cutting back on government-funded public services like libraries.