Retirees in CalPERS and CalSTRS will get a 2 percent increase in their monthly checks this year, even though a rare drop in the cost of living means that Social Security recipients get no increase.
So, they are at it again, those public pensions under fire for being unaffordably generous, a threat to state and local government budgets, and a potentially crushing burden for future taxpayers?
The financially troubled U.S. Social Security system, rarely criticized for being overly generous, provides no increase this year because its payments are adjusted annually to reflect the consumer price index, which fell last year.
A publication of the AARP, formerly known as the American Association of Retired Persons, says it’s “the first time in a generation” that Social Security will have no cost-of-living adjustment.
Over the years Social Security has kept pace with inflation, although as the AARP article notes the consumer price index may not accurately reflect one of the biggest expenses for some retirees, rising health care costs.
The annual increase for most CalPERS and CalSTRS retirees, on the other hand, is not based on the consumer price index. It’s a fixed amount, 2 percent, which has not kept pace with inflation in recent decades.
The California Public Employees Retirement System board was told in February that the overall inflation rate last year was negative 0.4 percent, “the first time that inflation has ever been reported negative in the cost of living report.”
A staff report said inflation has averaged 3 percent since 1983, an increase matched by Social Security annual cost-of-living adjustments but not by the CalPERS adjustments.
If inflation averages 3 percent in the decades ahead, as expected in CalPERS actuarial projections, the report said there will be a significant decline in the purchasing power of CalPERS pensions.
“If this average inflation continues into the future, given an annual cost of living adjustment of 2 percent compounded, and no prospective ad-hoc increases, the purchasing power of new retiree benefits would fall to 80 percent in their 21st year of retirement and 75 percent in their 25th year of retirement,” said the report.
A decline in purchasing power may get little sympathy from critics who think some CalPERS pensions are too generous, particularly when coupled with lifetime health care that only costs small doctor and hospital co-pay fees if an average plan is chosen.
Police and firefighters can retire at age 50 with pensions worth up to 90 percent of their final pay. After 40 years on the job, a typical state worker can retire at age 63 with a pension worth 100 percent of their final pay.
But these are extreme examples. CalPERS says the average monthly retirement payment is $2,101 and 78 percent of the nearly 500,000 retirees receive $36,000 a year or less. Losing a fifth of the purchasing power after two decades could hurt.
A supplementary payment keeps pensions for state and non-teaching school employees from losing more than 25 percent of their original purchasing power, 20 percent for retirees from the more than 1,500 local governments in CalPERS.
Legislation a decade ago that created the current state worker retirement formulas, which Gov. Arnold Schwarzenegger contends are “unsustainable” and wants to roll back to the previous level, provided an unusual retroactive pension increase for retirees.
Under SB 400 in 1999, CalPERS members who retired in 1997 got a 1 percent increase, retirees in 1995-96 got 2 percent, 1990-94 3 percent, 1985-89 4 percent, 1975-84 5 percent, and 1974 or before 6 percent.
Where inflation is a major issue and can stir emotions, however, is the California State Teachers Retirement System. Elderly retirees, mostly women, have had the original purchasing power of their modest pensions nearly evaporate.
A chart in a report delivered to the CalSTRS board last week shows (page 6) that the pensions of teachers who retired in the early 1970s have lost more than 80 percent of their original purchasing power.
Unlike most CalPERS retirees, CalSTRS retirees do not get Social Security in addition to their pensions. And many, if not most, CalSTRS retirees do not get health care as part of their retirement package.
Through a series of maneuvers over the years, a supplemental payment and the annual 2 percent increase are now intended to keep the pensions of all CalSTRS retirees from dropping below 85 percent of their original purchasing power.
The staff report said “restoring purchasing power to 85 percent will require supplemental benefit payments of approximately $367 million for 100,779 benefit recipients during the 2010-11 fiscal year.”
To make the supplemental payments, CalSTRS has used about $300 million received over seven years last decade from the state share of the sale of the Elk Hills naval petroleum reserve.
But most of the money for the supplement comes from the state general fund. The new state budget proposed by Schwarzenegger in January would provide $565 million for the supplement and $629 million for the basic CalSTRS pension.
The state withheld a $500 million supplemental payment in 2003, but the courts forced payment later with interest. A legislative deal that increased purchasing power from 80 to 85 percent in 2008 makes a $66 million cut in the state supplement payment.
Most public pension boards in California, including CalPERS, have the power to set the annual payments that government employers make to their pension funds. But CalSTRS needs legislation to boost contributions.
Like most retirement systems, CalSTRS is underfunded after big investment losses in the stock market crash. Its planning to make a pitch for a contribution increase next year, a tough sell as the state and school districts struggle with budget cuts.
The CalSTRS board is being kept informed of public pension action in other states. Reports say about two dozen states have, among other things, increased contributions, cut benefits for new hires or skipped payments to pension funds.
Jack Ehnes, the CalSTRS chief executive officer, told the board last week that Colorado is attracting attention. A shared-pain solution increases contributions from employers and active workers and cuts retiree inflation adjustments.
The Colorado retirees would get no inflation adjustment this year and after that a standard 3.5 percent annual inflation adjustment would be reduced to 2 percent. A lawsuit contends the legislation makes an illegal cut in benefits promised retirees.
“Their solution has deeply challenged the constitutional rights of members’ benefits, so I would never advocate that to you here,” Ehnes told the CalSTRS board. “But it is one of the most interesting studies because if it holds, they were able to achieve a solution in a rather quick manner with a lot of people putting skin in the game.”
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. For more, visit Calpensions.com