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CalPERS actuary: Pension costs are not sustainable

August 13, 2009

This new article is almost humorous in how tragic the situation is for CALPERS.

The CalPERS chief actuary says pension costs are “unsustainable,” and the giant public employee pension system plans to meet with stakeholders to discuss the issue.

It’s about time the actuary says this.  Many people have know this for a long time.

Ron Seeling, the CalPERS chief actuary, described the process used to “smooth” the rate increases that will be imposed on the 1,500 local government agencies in CalPERS in 2011 in the wake of the stock market crash.

This seems smart enough.  If they were to immediately raise the rate, it would likely cause even more hardship for the cities.  I don’t actually agree with it since I think cities need to face reality now, not have the can kicked down the road for them.  But it gets better….

Instead of a rate increase of 4 to 20 percent of pay, the smoothing will reduce the rate hike to a more manageable 0.5 to 2 percent of pay.

Wow.  A smoothing function that reduces the rate increase by 10 times?  I’d like to see the projections for this into the future.  At what point and by how much are they expected to rise?

Keep in mind, these are payments being made into a fund in order to cover future obligations.  We’ve made promises in the past (well, politicians and bureaucrats have made promises) to make payments in the future.  Remember, pensions are debt.  So what is happening is we’re delaying the funding – basically we are using debt (by delaying the rate increases) to make payments on the fund that will pay our debt.  Can we have more use of debt?  At some point we either need to make these payments or default.

“We are facing decades without significant turnarounds in assets, decades of — what I, my personal words, nobody else’s — unsustainable pension costs of between 25 percent of pay for a miscellaneous plan and 40 to 50 percent of pay for a safety plan (police and firefighters) … unsustainable pension costs. We’ve got to find some other solutions.”

I like his honesty.  Unfortunately he says “pension costs” when it would be more accurate to say “the benefits we promised and continue to promise.”  But yes, he is correct, we have to find other solutions.

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