This slide show was developed in 2006 and presented at several meetings of constituents. In the face of renewed attacked on public employee benefits, most.

This slide show was developed in 2006 and presented at several meetings of constituents. In the face of renewed attacked on public employee benefits, most of the content remains relevant today.

7/1/2006 1

7/1/2006 2

The California Faculty Association presents…

George Diehr

Stand up

to the

Pension

Privatization

Gamble

7/1/2006 3

A group plan that serves us by managing:

• Our health insurance

• Our secure retirement program

• Investments of our pension money

What is CalPERS?

7/1/2006 4

CalPERS is a

healthy

retirement system.

7/1/2006 5

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

7/1/2006 6

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

California.

7/1/2006 7

7/1/2006 8

Three-pronged attack

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

7/1/2006 9

These attacks would…

• End retirement security for new employees

• Increase paycheck deductions for all employees

7/1/2006 10

The claim that pension costs for the state are

exploding and impossible to sustain

is a myth.

7/1/2006 11

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

7/1/2006 12

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

7/1/2006 13

State Contribution Liability and Cumulative Reserve with Fixed Contribution Rate

1,1201,236 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

7/1/2006 14

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

7/1/2006 15

Historical Rates with Proposed Stabilization

7/1/2006 16

These attacks on publicretirement systems

could cause a pay cut for employees

of as much as 6%.

7/1/2006 17

The Budget Proposal wouldfreeze the state’s share of

payments for health insurance premiums.

7/1/2006 18

Plus, the bill and ballot initiative would end

death & disability benefits for all employeesand their families.

7/1/2006 19

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.”

7/1/2006 20

DB versus DC

(Defined Benefit vs. Defined Contribution)

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

7/1/2006 21

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

7/1/2006 22

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

7/1/2006 23

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

7/1/2006 24

“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

7/1/2006 25

Administrative costs

DB plan (CalPERS) = 0.18%

DC plan (typical 401k) = 1%+

7/1/2006 26

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

CalPERS member now gets, you would have to pay in

much more.

7/1/2006 27

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

7/1/2006 28

“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

7/1/2006 29

The average monthly benefitpaid to a retiree from public

service in California is$1,669.

7/1/2006 30

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.

7/1/2006 31

“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 Schwarzenegger

Orange County Register

7/1/2006 32

7/1/2006 33

Mike Peters, Dayton Daily News Kings Features Syndicate

R

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

7/1/2006 34

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”

7/1/2006 35

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.

7/1/2006 36

Be Informed. Get Involved.Resources & Contacts:

George Diehr: [email protected]

CFA: www.calfac.org

CalPERS: www.calpers.gov

AFL-CIO Center for Working Capital:RetirementSecurity.info