Millennials Must Recognize Need for Public Pension System Reform

Published January 28, 2015

Since the midterm elections, there has been much talk about the young people who didn’t turn out to vote. There are approximately 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.

An issue that should be of particular concern to millennials is the need to reform California’s broken pension systems.

‘For Years to Come’

California’s nonpartisan 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 (CalPERS) has not yet reported its actuarial values of 2013 assets and liabilities, but among its four defined benefit plans it has an unfunded liability of about $60.6 billion.

The state’s teachers’ retirement system, CalSTRS, had an unfunded liability of $70.5 billion in 2012 and $73.7 billion in 2013.

In 2013, CalPERS contributed only 87.7 percent of its annual required contributions.

In 2014, Gov. Brown worked with the legislature to increase contributions—they are controlled by statute. 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.

Bloated Bureaucracy, Pension Liabilities

The University of California retirement system had an unfunded liability of $11.6 billion in 2012 and $13.8 billion in 2013. In 2013, it paid only 35.7 percent of its annual required contributions. This prompted the university regents to increase tuition, 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 California public pension system’s funding ratio is 77, compared to 90 percent in 2003. In 2013 the state paid only 65.6 percent of its aggregate annual required contributions.

If the state systems had paid their full contribution every year for the past decade, more than $41 billion would have been paid into the system, counting contributions and the associated returns. Instead, these missed payments have become compounding debt, for which future generations will be responsible.

Another Pension Increase

In 2012 Brown signed a set of nominal pension reforms capping some pension costs, though most of the changes only impacted new employees. 

However, in August 2014. CalPERS recently contravened both the spirit and the letter of the law, allowing specialty payments, such as bonuses for educational certification or seniority, to be counted as base pay, for purposes of calculating pensions. This will further boost the state pension fund’s costs and put many localities contracting with CalPERS in the unenviable position of accommodating higher costs on their employees and pensioners.

Pay Now or Pay Later

This accumulation of unfunded obligations 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 receive, such as education, public safety, roads, water systems, parks, beaches, and libraries.

Fundamental reforms are needed to depoliticize pension benefits and policies and make pensions fair to government workers and accountable to taxpayers in a simple and transparent manner.

Government employees deserve retirement accounts that they own and are portable and transferable without the penalties associated with the current politician-controlled system.

The status quo may endanger our public institutions for generations to come, but reform won’t happen unless millennials get informed and engaged. If this doesn’t happen, state government retirees will continue to collect handsome guaranteed pensions, and younger taxpayers will still be left with the bill.

Lance Christensen ([email protected]) is director of the Reason Foundation’s Pension Reform Project. An earlier version of this story appeared at Reason’s Out of Control Policy Blog at Reprinted with permission.