With 28 percent of what it owes to members unfunded, California’s state employee pension system of $465 billion in assets is facing significant headwinds. Changing demographics and a weak economy are threatening the future of California’s state employee pension system, according to some economists.
All the time and money spent by investment committees debating, sourcing and allocating to private funds, consultants, hiring new employees, and putting together endless reports to track the thousands of investments, all of it absolutely wasted, Meb Faber co-founder and Chief Investment Officer of Cambria Investment Management wrote in a November report analyzing the system.
The California Public Employees’ Retirement System, better known as CalPERS, manages approximately $465 billion in assets and is the nation’s largest public pension fund. It is responsible for managing the retirement income of more than 2 million members, and administers retirement and health benefits.
With approximately 28 percent of what it owes to members unfunded, as of June 30, the system is facing significant headwinds, according to experts.
Their structure is so complicated that for a long time, CalPERS couldn’t even calculate the fees it pays on its private investments, Mr. Faber wrote. Nowhere in this mission does it state the goal is to invest in loads of private funds and pay the inflated salaries of countless private equity and hedge fund managers, but that is exactly what CalPERS does.
An aging workforce puts financial stress on the system, as the ratio of employees paying into the fund decreases when retirements spike. Such has resulted in fewer members contributing revenue to the fund, with the ratio dropping by 40 percent since 2001.
The number of Californians aged 65 and older has grown from 9 percent of the population in 1970 to more than 15 percent in 2022, according to Census Bureau statistics, with estimates reaching as high as 21 percent by 2030.
Declining birth rates combined with longer lifespans leave fewer employees to cover the pensions of prior generations, resulting in expanding unfunded liabilities, according to experts.
Investment returns need to exceed seven percent annually to cover expenditures, according to the agency. The fund, however, routinely fails to produce such — with the agency reporting 5.8 percent gains for the most recent fiscal year following a 6.1 percent loss in the previous.
Some critics noted the returns reported by the agency failed to meet industry standards and questioned the fund’s investment strategies.
Pensioners would have been better served had CalPERS simply passively invested pensioners assets into broad-based index funds, Mr. Winegarden wrote, referring to so-called simple investment instruments that spread risk across broad sectors of the market. It would have been a lot less costly for pensioners too.
Critics also highlight the funds’ $4.5 billion in venture capital investments this year — equating to approximately 15 percent of all investments made in the sector by any investors, according to financial filings. Such goes against a nationwide trend where institutional investors have divested from similar assets due to concerns of risk following the collapse of several banks with significant venture capital investments earlier this year.
Rising interest rates and dropping real estate prices have also created unpredictability for investors like the pension fund, according to the agency.
While having shortages is not new to the agency, this year’s — totaling approximately $245 billion, according to the Reason Foundation, a nonprofit public policy think tank — is about a 10 percent increase over last year.
The shortfall could be resolved by increasing contributions from both the state — as the employer — and from individual employees, according to the agency.
While the financial situation remains a concern, some say the issue is manageable and point out that California is not alone in carrying significant pension debt.
Hawaii, Kentucky, Illinois, Texas, and most other states all have multibillion-dollar pension deficits, with amounts nationwide totaling $1.3 trillion, according to the Reason Foundation. Only Washington and New York have fully funded pension programs with surplus holdings.
CalPERS does not have as much money as it should have, but it is not close to going broke or needing an extraordinary bailout, Marc Joffe, policy analyst for the Cato Institute — a Washington, D.C.-based think tank — told The Epoch Times Dec. 8. Systems in some other states have worse funding levels.
