Generous Benefits Will Bankrupt California

From the WSJ, 12/18/08, A4:

Calpers, which stands for California Public Employees' Retirement System, is California's pension fund for government workers. It provides retirement and health benefits to more than 1.6 million state and local public employees. From June 2007 to June 2008, the fund declined from $239 billion to $182 billion. Basically, Calpers lost $57 billion of taxpayer monies. Even with this loss, Calpers has almost $113,000 for each California employee's retirement and health benefits. This amount sounds generous, and it's certainly better than what most Americans have, but the pension is still underfunded. As a result, taxpayers will be forced to pay higher taxes to make up the shortfall, or will suffer inflation and a weaker American dollar as the government prints money to give to itself. In this way, public pensions are ticking time bombs, ready to release dangerous inflation unless something is done.

Congress and state legislatures talk about regulation, but they don't pass laws forcing cities and states to fully fund their pensions and/or to prevent borrowing money from pension funds. I remember Al Gore talking about putting Social Security funds into a "lock box," i.e. a box that is untouchable. Too often, when cities, counties, and states need money to finance a project or to cover a revenue shortfall, they dip into the retirement funds of police officers, firefighters, and other government employees. Eventually, the monies will have to be paid because a) the government employees have paid into the system; and b) the political will to reduce or deny retirement funds is non-existent. Just witness the auto bailout--if we cannot avoid printing money to give to GM and Chrysler, which lost billions of dollars annually, we surely cannot avoid printing money to give to retirees).

In addition to creating a lock box, the government needs to pare down benefits. Every dollar paid to a government employee means another dollar coming out of non-government employee pockets. Here is a quote from the WSJ story:

Like many residents who work for private employers, Ms. Nolan-Stewart, an AT&T manager, says she is astounded at the generosity of public-employee pensions. "If I were to retire, my retirement would be one-quarter of what I make today for the rest of my life," she says. By contrast, city firefighters and police who retire at age 50 with 30 years of service may retire with 90% or more of their final salary.

The WSJ (12/17/08, A1) also reported that Calpers used leverage (borrowed money) to boost returns; however, using leverage also means that losses are magnified, which may explain the fund's recent poor performance.

So Calpers engaged in a risky investment strategy with taxpayer money, and few Californians seem to care. Americans seem to have been so distracted with Iraq, they forgot about domestic surveillance and protecting our finances from government ineptitude. That's too bad, because history shows that every major empire has collapsed from within, not from an outside threat.