The state’s two largest pension funds reported end-of-year investment returns that again exceeded their assumed average annual rate of return. The California Public Employees Retirement System (CalPERS) reported a net return of 8.6 percent. The California State Teachers Retirement System (CalSTRS) did even better, earning a 9 percent return on its investments
Similar to mortgages, pension funds are designed to invest and pay out over the long- term.
That’s good news, but the better news is both funds’ rate of return over a significant span of time. Over 30 years CalPERS has averaged an 8.1 percent annual rate of return. Over 25 years, CalSTRS has averaged 7.7 percent.
What these numbers mean is that even after suffering huge losses in a once-a-century meltdown of the financial markets in 2008, both funds managed to weather that catastrophe, due to long-term returns that exceed assumptions.
This will come as a surprise to those who have been reading only alarmists’ often inaccurate commentary about “unfunded liabilities.” This is an accounting term being used recklessly by some to imply that the state’s large pension funds are somehow on the brink of insolvency.
That is not at all the case. In accounting terms, “unfunded liability” refers to the difference between current assets and the sum of a pension fund’s current and long-term future liabilities. Similar to mortgages, pension funds are designed to invest and pay out over the long- term. No homeowner is required to have 100% of their total mortgage costs in the bank, and neither are pension funds.
These plans include significant reforms that increased the full retirement age for workers hired after Jan. 1, 2013, eliminated pension abuses and capped benefits to stop six figure pensions.
As experts from the American Academy of Actuaries have noted, the funded ratio of a pension fund is expected to fluctuate based on economic cycles. That means periods in which “unfunded liabilities” exist are normal, expected and not a reason to worry.
The funded ratio of CalPERS was once as high as 128 percent during the dot.com boom that peaked in 1999, and dipped to as low as 61 percent immediately following the 2008 financial meltdown.
CalPERS’ funded ratio now stands at 71 percent and CalSTRS’ is slightly below 70 percent. What matters much more than any moment-in-time measurement is whether a fund has a plan in place to build up its funded ratio over a reasonable period of time.
Such plans are in place in California.
These plans include significant reforms that increased the full retirement age for workers hired after Jan. 1, 2013, eliminated pension abuses and capped benefits to stop six figure pensions. They also include a lowering of the funds’ discount rate, which is the assumed average annual rate of return on investments, to 7 percent.
The lower rate fortifies the funds’ financial status because it reduces any risk they will fall short of their long-range assumptions.
With another year of solid returns, the funds are continuing along the road to full recovery – meeting their obligations to retirees and taking in more money than they pay out in benefits.
Still, alarmists do what they do best-manipulate information to promote their agenda. They continue to distort data in their quest to abandon pensions and replace them with high risk, defined contribution savings plans. Study after study has shown that such plans cost workers more money in fees, produce lower overall investment returns and shortchange workers once they retire. These plans are good for Wall Street, but bad for workers.
Like the head-in-the-sand proponents of trickle-down economics, the alarmists keep pitching their snake oil, even though data shows their theory does not work.
They won’t like this commentary. The last thing they want you to know is good news that runs counter to their agenda.
Editors’ Note: Dave Low is executive director of the California School Employees Association and chairm of Californians for Retirement Security.