Millennials and Pensions – Do They Know Public Pension Systems Need Reform?

After the midterm election results there has been a lot of talk about the young people who didn’t turn out to vote. There are around 8 million millennials, people ages 18-to-35, in California. And the conventional wisdom has been that since they helped elect President Obama twice, they’ll continue to help elect Democrats. But what about all that debt piling up on their backs?

The non-partisan Legislative Analyst’s Office predicts $340 billion in debt, deferred payments, pension costs and other liabilities will be on California’s balance sheets for years to come. Gov. Jerry Brown’s latest budget dedicates just over $10 billion to pay down this debt, barely making a dent in the problem.

The largest pension system in the state, the California Public Employee Retirement System has not reported their actuarial values of assets and liabilities for 2013 yet, but out of its four defined benefit plans, it has an unfunded liability of about $60.6 billion. In 2013, CalPERS only contributed 87.7 percent of their annual required contributions, not even making a full payment.

The states teachers’ retirement system, CalSTRS, had an unfunded liability of $70.5 billion in 2012 and $73.7 billion in 2013. In 2013, CalSTRS paid only 44.12 percent of their annual required contributions. Governor Brown worked with the Legislature to increase contributions — since they are controlled by statute — but his plan is to increase payments over the next five years and spread the costs to school districts and teachers. This will likely increase burdens on local public school budgets and impact their general fund spending priorities.

The University of California retirement system had an unfunded liability of $11.6 billion in 2012 and $13.8 billion in 2013. In 2013, they paid only 35.7 percent of their annual required contributions. This recently prompted the university regents to increase tuition on students to pay for a bloated bureaucracy and massive pension liabilities.

In total, taking the public statements of all the state systems at face value, the California defined benefit pension system had $142.7 billion in unfunded liabilities in 2012 (the figure for 2013 is not available as CalPERS has not provided the data). The aggregate funded ratio for the whole system in 2012 was 77 percent, compared to 90 percent in 2003. In 2013, the state only paid 65.6 percent of their aggregate annual required contributions.

It should be noted that if the state systems had simply paid their full contribution every year during 2003-2013, the cumulative missed contribution plus the associated returns is more than $41 billion. Instead, these missed payments have become compounding debt for which future generations will be responsible.

In 2012, Governor Brown signed a set of nominal pension reforms that capped some pension costs, though most of the changes only impacted new employees. However, CalPERS recently contravened both the spirit and the letter of the law and allowed 99 specialty pays to be counted as base pay for purposes of calculating pensions. This not only boosted the costs of the state pension fund, it also put many localities who contract with CalPERS in the unenviable position of accommodating higher costs on their employees and pensioners as these calculations put pressure on their bottom lines.

While state government retirees collect handsome guaranteed pensions, young taxpayers will foot the bill. This has particularly serious ramifications for the millennial generation, who are sinking under the weight of public debts and obligations made by people years before they were even born. Paying those debts leaves far less money to fund government services and amenities they’d like to focus on, like education, public safety, roads, water systems, parks, beaches and libraries.

More fundamental reform is needed to depoliticize pension benefits and policies, make pensions fair to government workers and accountable to taxpayers in a simple and transparent manner. Further, government employees deserve retirement accounts that they own, are portable and transferable, without the penalties associated with the current politician-controlled system. Reform also needs to eliminate unfunded liabilities on future generations.

Millennials won’t be the only losers if our elected officials do not have the courage to reform the state’s broken pension systems. The status quo may endanger our public institutions for generations to come. But reform won’t happen unless millennials get informed and engaged.

Lance Christensen directs the Pension Reform Project at Reason Foundation.

Comments

  1. Public pension unfunded liability is out of control, based on compensation levels, retirement formulas and inadequate contributions ~ the government (local, county and state) knows it and does NOTHING about it.

  2. Thankfully, I suspect that the vast number who post on this blog lived the majority of their lives when America, as well as California, was a great place to live. Unbounded opportunity, self sufficiency, a pretty decent educational system, and somewhat reasonable tax structure and tax base.
    As the liberal/progressive agenda advanced in the American culture, (LBJ & on) this country has been in a constant state of decline.
    Sorry to see it go, and glad I lived in the time frame that I did.
    I actually feel sorry for the millennials. They were sold a bill of goods (Barack Obama) and bought it hook line and sinker.
    Although things weren’t in the best shape prior to the Obamination, financially, the country will be in much worse when he leaves.
    Unless things drastically change, they (the millennials) will NEVER have the opportunities that we had when we were in that age group.

  3. Tough Love says

    Interesting article, especially since (just yesterday) I commented on this exact subject …. see below:

    “Captain, While I agree with you, it’s going to take one heck of a ground-swell to overcome (a) the huge political influence of the Public Sector Unions, and (b) the legal structure built to protect all aspects of Public Sector pensions & benefits making material reform exceedingly difficult (i.e., the crap about replacing anything taken away with something of equal or better value). While rallying the socket moms is interesting, it’s easier to rally high school and college kids to a worthy cause. Teach them how THEIR future is being stolen from them and get THEM to organize Constitutional change and to vote out the pathetic Democratic establishment owned buy the Unions.”

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