California’s $500 billion pension shortfall

A new study estimates California’s pension shortfall at $500 billion. Employing a risk-free discount rate, this estimate is far higher than the $142.6 billion estimated by the state. Currently California assume a 7.75 percent discount rate for two plans: CalPERS and CalSTRS, and a 7.5 percent discount rate for UCRP. It’s an amount that is too large to be addressed solely by future benefit cuts. These findings haven’t been received very warmly by State Treasurer Bill Lockyear who says the estimate relies on an overly-low discount rate. Contrary to the Treasurer’s assessment, estimating pension liabilities isn’t about cherry-picking numbers but instead about how to accurately value pension liabilities which are guaranteed by the state of California, and thus should be considered safe and risk-free by beneficiaries.

Such a massive shortfall means bad news for California’s budget and fiscal outlook. The share of pensions in California’s budget will have to triple. Stanford professor, Joe Nation, author of the study and a former Democratic Assemblyman warns that each day the state does nothing it costs $3.4 million.

The study  finds that CalPERS under assumed rate of return of 7.75 percent has an 82 percent chance of its assets falling short of obligations. To meet the problem Nation proposes higher employee contributions, taxes, and reducing plan costs by increasing the retirement age, reducing benefit formulas, and moving to a hybrid Defined Benefit/Defined Contribution system. In addition, he critiques Governor Brown’s proposal. For more, read the study, which contains some very interesting data and analysis.

 

One thought on “California’s $500 billion pension shortfall

  1. Rob McMIllin

    Stanford professor, Joe Nation, author of the study and a former
    Democratic Assemblyman warns that each day the state does nothing it
    costs $3.4 million.

    Shouldn’t that be exponentially increasing as the difference between expected and real asset growth diverge?

Comments are closed.