7/1/2006 1

The California Faculty Association presents…

George Diehr

Stand up to the Pension Privatization Gamble

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A group plan that serves us by managing:

• Our health insurance• Our secure retirement program• Investments of our pension money

What is CalPERS?

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CalPERS is a

healthy retirement

system.

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The CalPERS Board of Administration Sets Policy

13 members:

6 elected by CalPERS members

2 appointed by the governor

1 appointed by the legislature

4 ExOficio by virtue of their state office

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Retirement security is part of how we are paid in return for our service to

California.

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Three-pronged attack

• 2005/06 budget proposal• Bill in legislature: ACA 5• Ballot initiative

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These attacks would…

• End retirement security for new employees

• Increase paycheck deductions for all employees

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The claim that pension costs for the state are

exploding and impossible to sustain

is a myth.

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CalPERS’ Current Funded Ratio is Not UnusualCurrent ratio is 84% and climbing.

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In his State of the State address, Schwarzenegger said the state’s pension system is “another financial train on another track to disaster.” The state’s pension contributions have soared to $2.6 billion from $160 million in just four years, he noted.

State Pension Contributions, Millions $The Critics' Myopic View

160 157

677

1,190

2,213

2,564

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

'99-00 '00-01 '01-02 '02-03 '03-04 '04-05

San Diego Union-Tribune headline:“State’s CalPERS payment surges 18-

fold in 3 years.”

Figure 1

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State Contribution Liability and Cumulative Reserve with Fixed Contribution Rate

1,120 1,236 1,223

2,213

2,564

157160

766 677

1,190

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

'95-96 '96-97 '97-98 '98-99 '99-00 '00-01 '01-02 '02-03 '03-04 '04-05

If the state contribution had continued to grow at a 6% rate and earn 5% interest, the cumulative savings would amount to over $4.4 billion at the end of 2004/05.

State contribution at 6% annual increase.

Figure 3

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Current Rates are High, But Not Unprecedented

State Contribution Rates

0%

2%4%

6%8%

10%12%

14%16%

18%20%

1979

-80

1981

-82

1983

-84

1985

-86

1987

-88

1989

-90

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

Fiscal Year

Con

trib

utio

n %

of S

alar

y

Tier 1

Schools

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Historical Rates with Proposed Stabilization

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These attacks on publicretirement systems

could cause a pay cut for employees

of as much as 6%.

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The Budget Proposal wouldfreeze the state’s share of

payments for health insurance premiums.

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Plus, the bill and ballot initiative would end

death & disability benefits for all employeesand their families.

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The essence of all the attacks:Who bears the risk?

Tom Campbell, Gov’s Director of Finance

“The fundamental goal is that employees, not taxpayers, bear

market risk.”

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DB versus DC

(Defined Benefit vs. Defined Contribution)

First they come for the new hires…later it will be the rest of us.

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Defined Benefits (DB) = Traditional Pension System

• The retirement benefit is guaranteed for life

• Risks are spread out over time

• Risk is shared and underwritten by the employer

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More features of Defined Benefits (DB) system…

• Employees make fixed contributions• Employer contributions vary• Benefits & contribution rates are usually negotiated• Employees & employer share management costs • Money is managed in a pool to reduce overhead• Some (CalPERS) give death/disability benefits• Benefit increases protect against inflation

CalPERS benefits go up 2% a year

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Defined Contributions (DC) = Individual Risk Plan

• Benefits end when the individual’s money runs out

• Benefits depend on success of individual investments both during employment and retirement

• The individual alone bears all risk• Management cost shifts to the individual alone• No death, disability or survivor benefits• No no protection against inflation

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“You’re putting so much risk of the stock market onto each individual person, they become in danger of losing retirement protections” — Art Pulaski, California Labor Federation

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Administrative costs

DB plan (CalPERS) = 0.18%

DC plan (typical 401k) = 1%+

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To get the same benefits with a DC plan that a typical

CalPERS member now gets, you would have to pay in

much more.

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Example CalPERS Pension BenefitCommon plan: “State Miscellaneous, 2% at age 55”

Formula: Yrs * Age Factor * (Highest Salary - $133)

• Assume 30 years of service, age 63 at retirement and final salary of $5,000 per month.

• “Unmodified” retirement benefit is almost 75% (=30 years times age factor of 2.5%) of final salary.

• Pension = 75% * ($5,000 - $133) = $3,650.• + 2% per year increase for inflation.

Handout

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“Equivalent” Defined Contribution PlanUnder optimistic assumptions, what percent of salary must

be saved to purchase an annuity equivalent to the DB pension of $3,650/month?

• Assume: starting salary $1,157, increasing 5%/year for 30 years (=$5,000); 8% investment return.

• 22-year life expectancy at age 63 (IRS standard, male).• Need fund of $600,000 at retirement; return of 4.8%. See

http://www.totalreturnannuities.com/ • Requires contribution of over 21% of salary.

AND: no benefit to survivor, no inflation protection, no death or disability benefit.

Handout

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The average monthly benefitpaid to a retiree from public

service in California is$1,669.

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It isn’t broken. So why fix it?

Privatizing pensions will not help the state with the budget crisis.

No short-term savings.Likely none in the long term either.

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“There’s an old saying, so goes California, so goes the rest of the nation. That’s exactly what they’re worried

about. You talk about pensions. What do you think, it’s just about California? No. If California’s pension system goes, now it will go like an avalanche.” – Gov.

Arnold SchwarzeneggerOrange County Register

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Mike Peters, Dayton Daily News Kings Features Syndicate

R

“This is the California version of Social Security privatization.” – Carol Wills, California Professional Firefighters

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Consider the Sourcehttp://www.sourcewatch.org/wiki.phtml?title=Grover_Norquist

'The goal is to reduce the size and scope of government in half over the

next 25 years,’

....Norquist and the White House are so close that it is sometimes difficult to discern who is influencing whom.

But such Bush initiatives as privatizing Social Security,…bear all the marks of Norquist's thinking. – Jill

Zuckman, Orlando Sentinel, June 15, 2003, “Conservative operative is in the right place at the right time”

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Summary

Arnold’s “retreat” is strategic. He will be back.

Retirement security is part of total comp.

Eliminating the DB pension will leave many employees with no safety net.

CalPERS is not in trouble.

DB pensions are not bankrupting public agencies.

A DC plan is unlikely to save taxpayers money even in the long-run.

The larger crusade is to dramatically reduce public services.

CalPERS plays a crucial role in corporate governance: it benefits all investors.

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Be Informed. Get Involved.Resources & Contacts:

George Diehr: gdiehr@csusm.edu

CFA: www.calfac.org

CalPERS: www.calpers.gov

AFL-CIO Center for Working Capital:RetirementSecurity.info