The largest pension fund in the U.S., the California Public Employees Retirement System, also known as Calpers, returned a measly 1 percent on its investments last year. This marks the third time in five years that the pension fund has failed to reach the benchmark 7.5 percent it needs to fulfill pension obligations. The statement by Calpers’s CIO to Bloomberg is a masterpiece of understatement:
“Inevitably, a 1 percent return will be noted by some as significantly below our target return of 7.5 percent and questions will be raised as to whether that 7.5 percent is realistic,” the fund’s chief investment officer, Joseph Dear, said in remarks to reporters. “One percent is below where we would like it to be but it is well within the range of returns for the kind of portfolio we have.”
To be fair, Calpers earned 21 percent in 2011, and 12 percent in 2010. (Then again, it also lost 23 percent in 2009.) But the real problem here is not the returns; the global economy has been at best crab walking since the onset of the financial crisis, and investors the world over are seeing slim or negative returns this year. Rather, the problem is the fact that public funds have banked on unrealistic expectations for return on investment for years. Until it was lowered in March, Calpers’ assumed rate of return was 7.75 percent. This rate is used to calculate how much money the fund will need to cover the benefits and how much employers have to contribute.When Calpers underperforms, the state of California and local municipalities must find the money from somewhere to make up the difference to pensioners. This means that next year, when California will once again be drowning in red ink, it will see its pension costs rise. It’s a grim reminder that the blue model approach to public finances is built on denial and thus deeply, dangerously unsustainable.What is also true is that reliance on a high rate of return drives the pension funds toward high risk investments — investments that perhaps not coincidentally result in huge fees for Wall Street. Shoveling the retirement savings of middle class state employes to ethically challenged investment gurus on Wall Street does not strike Via Meadia as appropriate or wise — but then we’re just a simple blog without a lot of fancy financial training.Worse, the fund’s actuary recommended a lower target, but the fund rejected it — not because the current number is accurate, but because using a more accurate rate of return would place too great a burden on struggling governments! Instead, they will close their eyes, clap their hands, and wait for Tinkerbelle to balance the books.Perhaps it’s time to occupy the state pensions.