Robert Cruickshank is a historian, activist, and teacher living in Monterey. For more, visit the California Progress Report.

The headlines were breathless: California pensions short by $500 billion!

An independent analysis by Stanford graduate students was commissioned by Arnold Schwarzenegger, and is being used by California’s own deficit scolds to argue for cutting pension benefits. For that reason, it’s important we get this issue right.

So, let me give an independent analysis from this University of Washington graduate student: the $500 billion figure is overblown and assumes a much lower rate of return than has historically been the case.

According to the study’s authors, as reported in the New York Times:

“Currently, governments discount pension values by using the return they expect their pension investments to earn over the long term. For most public pension funds, that means about 8 percent. In California, the teachers’ fund uses 8 percent, Calpers uses 7.75 percent, and the University fund uses 7.5 percent.

The Stanford team found fault with that approach. The researchers wrote that in today’s economic climate, such rates are associated with more speculative securities that carry some degree of risk, like those of emerging markets. Pensions, by contrast, are constitutionally protected and therefore the payments to public employees and retirees should carry almost no risk.

After the researchers applied a risk-free rate of 4.14 percent, equivalent to the yield on a 10-year Treasury note, the present value of the promised benefits ballooned. The researchers came up with a $425 billion shortfall for the three funds.”

But is that rate of return sensible? Over the “very long-term” the rate of return on  the S&P 500 has been between 6% and 7% when adjusted for inflation.

I’m not the only one questioning the Stanford grad students’ methodology. Economist Dean Baker slammed the rate of return assumptions:

“There have been few people who have been more critical of assuming exaggerated market returns than me, but 4.14 percent nominal? Anyone want to take a bet that California’s pension funds will do better than this?…

Stocks have historically provided a real return of 7 percentage points above the inflation rate, so assuming a nominal return of 7.0 percent for the mixed portfolio is hardly unreasonable.

In short, the story of outsized pension liabilities in this article is driven largely by a ridiculous assumptions about pension returns. There is no reason whatsoever that the state of California should use this 4.14 percent discount rate in assessing its pension liabilities. This calculation would lead it to exaggerate its pension liabilities and therefore raise taxes or cut pensions and/or other spending unnecessarily.”

CalPERS has come under criticism for too-risky investment practices in the ’00s bubble, and Baker shares those criticisms – but 7.0% rate of return above inflation does indeed seem reasonable. In that situation, the long-term gap in pensions is much smaller and more manageable. Of course, it’s possible that we’re entering a prolonged period of low economic growth, but in that case the state has much bigger problems than the pensions gap – which, it must be remembered, doesn’t have to be paid out all at once.

The fiscal scolds that are pushing these numbers, like those at the national level, believe that our future prosperity can only be achieved by gutting the prospect of a secure retirement/old age. In the California of Pete Peterson’s and Arnold Schwarzenegger’s future, people work until they die, and instead of properly funding pensions, we slash benefits and taxes in order to let the already-wealthy collect even more riches. The reality is that such a move isn’t necessary, and is instead being promoted by those seeking those riches.

That’s not to say there aren’t any problems surrounding pensions in California. The cost to local governments of these pensions isn’t cheap, and it is fueling right-wing movements in cities across the state to slash benefits for incoming workers, or to leave CalPERS entirely, as Pacific Grove voters mandated in 2008 (despite this being a far more costly move than just staying in CalPERS).

Here again, we’re presented with a false choice. It’s not pensions that are causing problems to local government budgets, but the loss of revenue from Prop 13, repeated theft of local government funds by the state, and the 2/3rds rule that makes it nearly impossible for cities to right their fiscal ship. With those rules and restrictions in place, it becomes easier for cities to blame their problems on their workers and their middle-class benefits.

In fact, it would seem that here again is another example of Arnold’s shock doctrine in practice – create a crisis and use it to attack your enemies and push through right-wing policies that would otherwise not have been possible. Just as Arnold pushes privatization of public schools through budget cuts, he pushes attacks on public workers and their pensions through cuts to local government funds.

It’s time Californians stood up against the root cause of the problem, rather than turning on each other and denying workers a financially secure old age.

Robert Cruickshank is a historian, activist, and teacher living in Monterey. He is a contributing editor at and works for the Courage Campaign, in addition to teaching political science at Monterey Peninsula College. Currently he is completing his Ph.D. dissertation in US history, on progressive politics in San Francisco in the 1960s and 1970s. This article was originally published in Calitics.