By Dave Low, Chairman, Californians for Retirement Security.
Recent attacks on pension changes passed by a bipartisan vote of the Legislature and signed by Governor Brown are exactly like each of the few Lotto tickets I’ve ever purchased: Wrong on every count.
The reforms, enacted in 2012, were designed to bolster the long-term health of California’s public pension systems, and they are doing exactly that. Their effects will be measured over the lifetimes of thousands of schoolteachers, firefighters, police officers, bus drivers, trash collectors, librarians and others whose labor provides the public services upon which all Californians rely.
Yet, after just four years, some critics believe a negative judgment can be rendered.
It is a judgment that ignores the fact that retirement ages for all workers hired after Jan. 1, 2013, were raised by two years or more, meaning that 200,000-plus new public employees will spend two more years contributing to the pension funds and two fewer years collecting benefits.
Experts projected that the 2012 pension reforms would reduce collective retirement benefits to public workers by about $85 billion over time, and a recent study showed that these savings are accumulated even faster than originally projected.
For rank-and-file workers who spend their careers driving school buses, serving lunches to senior citizens or processing unemployment claims, that amounts to real money and the prospect of real hardship in retirement. For example, a worker earning $40,000 a year over a 30-year career would have previously received a monthly pension of $2,000 a month previously, but now will receive $1,300 a month.
Critics make a fundamental error made by novice economists everywhere – the wrong-headed assumption that correlation is the same as causation. Yes, it’s true that the funded ratio of the pension plans has declined since the reforms were enacted, but the cause of that was a period of low investment returns, not a failure of the reforms.
Since Governor Brown’s reforms upped the amount workers must contribute from their paychecks to fund their retirement, the state has realized cost savings of up to 5.1 percent of payroll for public safety employees, and 1.2 percent of payroll for other workers.
And yes, public workers do contribute every month to their retirement plans. That’s a fact that the people to whom Gov. Brown recently referred to as “a few uninformed critics” always ignore when assailing public pensions. For the record, it ranges from 7 percent to 12 percent of their pay for most workers, depending on their jobs.
Critics proclaim that Gov. Brown’s reforms “won’t produce significant savings for decades.”
The fact is that these reforms are producing savings now, and will continue to do so for decades.
Critics can’t have it both ways, ignoring long-term savings from reforms because they are decades away, but calculating unfunded liabilities based on long time horizons to inflate the costs.
It is a challenge to comprehend the long and everlasting cycle of pension funds. New workers come into the system, older workers retire, retirees collect benefits and then, as do we all, succumb to mortality. The cycle renews daily, and, in the case of public worker pensions, will be sustained for as long as our democratic system of government is sustained.
But to properly assess public pension funds, comprehension of that long horizon is essential.
Investment markets will surge and soar, sag and plummet. The funding ratio will rise and fall. But a longer-term view shows that averaged over the last 30 years investment returns have met projections and expert studies predict they will continue to do so.
The 2012 reforms were enacted to make adjustments that will enhance the sustainability of the funds over time. They have begun to work, and will continue to work, for decades to come.
[divider] [/divider]
Dave Low is Chairman of Californians for Retirement Security, a 1.6 million member organization of firefighters, teachers, police officers, retirees, and other public employees. He also is Executive Director of the California School Employees Association.