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]