Pension Reform Has Made a Difference

March 8, 2017

Dan Borenstein's most recent column greatly oversimplifies and needlessly discounts the real impact that Governor Brown's pension reform has had since it took effect in January 2013.

Borenstein writes that the Public Employees' Pension Reform Act, or PEPRA, "relied mainly on slightly reducing benefits for new employees, which won't produce significant savings for decades."

In fact, the savings are occurring right now and already are finding their way to the bottom line of the state and the public agencies and school districts that are members of CalPERS.

Under PEPRA, employees hired after January 1, 2013, are required to contribute more to their pensions, and must also work longer before they can retire and begin to receive the benefits promised by their employers.

In the four years since the pension reform measures took effect, over 200,000 public employees (PDF) have been hired across California. Based on valuations as of June 30, 2015, here's what that means:

  • Cost savings for PEPRA employees for the state range from 1.2 percent of payroll for miscellaneous plans and up to 5.1 percent of payroll for safety plans, compared with the normal cost of new hires prior to PEPRA*.
  • Cost savings for PEPRA employees for plans in the schools pool are about 1.7 percent of payroll, compared with the normal cost of new hires prior to PEPRA*.

In his column, Borenstein also cites the "conservative assumptions" on pension debt issued by Joe Nation, a Stanford professor. Nation's calculations, though, assume that CalPERS' investments earn just 2.75 percent annually, a rate so extremely low that it naturally inflates debt totals to stratospheric levels.

CalPERS' investment earnings, however, are significantly higher than that over the long term, even in the face of severe economic turmoil and the near collapse of the global financial system:

  • 7.8 percent over the past five years
  • 4.6 percent over the past 10 years
  • 6.9 percent over the past 20 years

PEPRA already is bending the pension cost curve - and will keep doing so with greater impact every year going forward. Let's keep that in mind as the debate over public pensions continues.

*The two bullet points were updated to reflect PEPRA cost savings, specifically.

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