Blue Model Blues
The Pension Vise Tightens in California

Earlier this week, CalPERS—California’s pension fund for most public employees—reported abysmal annual earnings of 0.61 percent, a tiny fraction of the seven-and-a-half percent annual returns needed to keep it solvent over the long run. And its sister fund for teachers, CalSTRS, isn’t doing much better. The Wall Street Journal reports:

The nation’s second-largest public pension posted its slimmest returns since the 2008-2009 financial crisis because of heavy losses in stocks.

The California State Teachers’ Retirement System, or Calstrs, earned 1.4% for the fiscal year ended June 30, according to a Tuesday news release. The result is the lowest since a 25% loss in fiscal 2009 and well below Calstrs’ long-term investment target of 7.5%. Calstrs oversees retirement benefits for 896,000 teachers.

As Steven Malanga has noted, both of these union-managed funds are notorious for pulling political stunts even as they face gaping shortfalls, going on a misguided “green” investing binge that flushed taxpayer money down the drain, and pulling out of tobacco companies on moral grounds just before those stocks began to rise.

But the underlying flaw with the funds is not their politicization. If anything, these kinds of moves are a distraction from more pressing crisis of public employee retirement systems: That state legislatures have epically over-promised the level of retirement benefits they can reasonably provide, and obscured this reality by presuming levels of investment returns that are impossible to sustain, especially in this era of historically low interest rates.

This long-running failure of governance may be irreversible. All that’s left for state governments to do now is reform pension systems for new employees, phasing out defined-benefit systems for 401(k)-style plans, and, where possible, trim benefits or raise contribution requirements for current workers. In the meantime, federal policymakers should start thinking about a reform-for-relief framework that will enable states and localities to honor their obligations to retirees while getting their finances back under control for the long haul.

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