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Calpers Rebounds, California Still in Trouble


Here’s something we haven’t seen in a while—good news for California’s Calpers pension fund. After earning only 1 percent on its investments in 2011, Calpers rebounded in 2012, earning 12.5 percent, well above the expected rate of return of 7.5 percent. As Bloomberg notes, this growth was largely driven by the strong performance of the stock market over the same period:

The Federal Reserve’s third round of stimulus, coupled with economic data showing improvements and housing gains, drove the Standard Poor’s 500 Index up 18 percent in the same 12-month period. Profits at companies in the benchmark equity gauge rose for the fourth straight year in 2012 to a record.

This is indeed good news for the fund, but these recent gains are not the lifeline Calpers (or California) needs. If QE were to continue forever and the S&P to keep hitting record highs, the fund might be able to stay afloat with double-digit returns every year. In reality, Calpers will be back where it started once the market comes back to earth.

With more than $100 billion in unfunded liabilities, Calpers will need help from municipalities and the state, neither of which can afford to do so without gutting public services. If anything, this patch of good news could actually exacerbate the greater problem, by temporarily relieving the pressure on state pols who are all too eager to put off needed reforms for a few more years.

There’s an even more daunting structural challenge in the pensions crisis: over the next few decades the ranks of public employees will decline as more jobs become automated. Fewer people will be paying into plans that are expected to finance the retirements of a much larger cohort of retirees. When that time comes, it will be nearly impossible to keep a plan like Calpers funded without truly extraordinary investment returns.

[California seal image courtesy of Shutterstock]

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  • Jim__L

    The asset bubble is hale and hearty thanks to Bernanke.

    Hedge fund managers are also laughing all the way to the bank.

    • Andrew Allison

      I think that the point of the article was that CalPers looks good only as a result of an asset bubble that will inevitably pop (or that the the dollar will be so worthless by the time the beneficiaries get their pensions that it might as well have).

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