Dave Low is the Executive Director of the California School Employees Association and the Chairman of Californians for Retirement Security, a coalition of 24 unions including the California Teachers Association and the California Federation of Teachers. Low has been a leading advocate for the state’s public pension plans and actively pushed back against a proposed statewide ballot initiative that would have changed California’s constitution to allow state and city governments to make prospective changes to retiree benefits.
To better understand the issues around California’s pension plans, I spoke with Mr. Low. The following interview has been edited for clarity and length.
Chad Aldeman: California's pensions are significantly under-funded. As of June 30, 2012, the California State Teachers’ Retirement System (CalSTRS) was only 67 percent funded and had liabilities that were almost $71 billion more than its assets. CalPERS, the California Public Employees’ Retirement System, was underfunded by $76 billion. Can you talk about how we got here?
Dave Low: First of all the term “severely underfunded” is probably not very accurate. CalSTRs at 67 percent is underfunded, but in terms of actuarial analysis, a funded plan would be a plan that’s between 80 and 100 percent funded. So to say that all plans are severely underfunded is not completely accurate.
The main reason that we got here is because of the economic downturn and the abuse and fraud that went on on Wall Street that ended up sapping money from everyone’s pension plans as well as everyone’s 401(k)’s. During that crisis, plans lost approximately 30 to 40 percent of their assets which is a devastating hit. Individuals lost that amount or even more in their defined-contribution plans. So prior to the economic downtown, CalSTRS and CalPERS and most of the pension plans were more than 100 percent funded.
Aldeman: How do we unwind today’s under-funding problem? I know that both the large California state pension plans had a pretty good year of investment returns last year and exceeded their targets. Can we grow our way out of this problem? Are we likely to get back to 100 percent funding in the near future or anytime soon?
Low: I don’t think we’re going to get there anywhere in the near future, but I don’t know what might happen in the long-term. If you look at the past, in 1980, CalPERS, CalSTRS, and most of the California funds were at a funded status of 50 to 55 percent. Then over the next 20-25 years, they achieved a super-funded status at over 100 percent. So it’s possible to get back to 100 percent or greater over time, but I don’t think anyone would say that that’s going to happen over the short-term. It’s just not the way it works. Unless they put their money on red in Vegas and won.
Aldeman: Do you think changes need to be made to the existing plans, or do you think that prudent funding and more consistent investment returns will return them back to solid funding?
Low: Well, the legislature has already made changes to the plans. This past couple of years ago there have been changes to all plans in California. I don’t see any other dramatic changes that need to be made going forward.
Essentially, CalSTRS is in the situation they are in primarily because of under-funding, in addition to the fact that they lost so much money in the economic downturn and the debacle on Wall Street. They don’t have the legal authority to increase the rates on a year-to-year basis. So they are on a fixed-funded status and the legislature is working on that. I think it’s going to require several things to get CalSTRS back on track: legislatively, they probably need to increase the amount of money going into the fund. Then they also have to meet their mark in terms of their investments over time.
Aldeman: What about the legal protection known as the “California Rule”, which has been the subject of an attempted statewide ballot initiative recently? It grants employees the right to accrue future pension benefits that they haven't worked for yet as if a contract exists going forward. In practice, this might mean that an employer who wants to cut costs on retirement benefits must do so solely for new employees. Is this fair to new workers, or is this just a consequence of preserving that contract between existing employees and employers?
Low: I think it’s fair to the workers that are there, and I think that if employers determine that pensions need to be cut for new workers, new workers know what they’re getting when they come in. So the law is fair to both sides.
Aldeman: Your organization works to protect the retirement security of a diverse group of employees--firefighters, police officers, teachers, school employees, and other public employees. Do you think all of these workers should have the same type of retirement system, or do different groups of workers need different types of benefits?
Low: I think that yes, it doesn’t make sense for everyone to have the same thing because there are different types of jobs and different types of systems. For example police officers, firefighters, and teachers, generally are not in Social Security, so their formulas are reflective of that difference. Most other employees are in Social Security. I think the best thing to do is to have pension systems that are tailored to the needs of the employees and the ability of the employer to recruit and retain qualified people.
Aldeman: It’s not commonly known that all public-sector workers are not in Social Security. In our recent paper, we looked at California’s turnover assumptions and estimated that one-third of teachers won’t reach California’s 5-year vesting requirement and thus won’t qualify for a pension. These teachers won’t receive Social Security either. What steps if any should be taken to ensure their retirement security?
Low: I think that everyone should have retirement security, whether you work in the public sector or the private sector. If you work a career, you should be able to not be in poverty once you retire. The same is true for all the teachers who leave the profession. I don’t know where they go. Some of them go to the private sector, some of them might go to another public sector job. Wherever they go, I do know that this trend towards taking away pensions and putting people in 401(k) plans is creating a generation of people who are starting to retire now who don’t have anything saved up for retirement. I don’t think that’s good for people and that’s not good for society.
Aldeman: One of the things we wrote about in our paper is that there are a large group of new workers who aren’t staying in the pension system long enough to qualify for a pension, so they lose out on a pension, and they will also often lose out on employer contributions or interest on their own contribution. Are you worried at all for their retirement security?
Low: For the workers who don’t vest, they do get their own contributions back with interest. So they don’t lose out on the interest. If they don’t work for five years, then they do leave the employer contributions in the system. I think that that’s the way the system is set up; I don’t think it’s extremely unfair. If they fail to vest, it’s not their money. If they come back into the system, if they leave their money in the system, they can come back and work and eventually vest, or at least they can get their money back with interest. The bigger concern is for those employees and where they go next and what type of system is available to them in their next job.
Aldeman: Defined benefit pension systems work best for a stable workforce, for someone who says in the same pension system for an entire career. But American society has become more mobile over time, and recent data from the Bureau of Labor Statistics suggests the median adult employee in the U.S. has only five years of experience with their current employer. Do you think traditional defined benefit plans still support this type of workforce? If not, what would we do about it?
Low: Well, they can. I think that the problem is not the design of defined-benefit pension systems; the problem is that people are just getting less and less security all around. Social Security is constantly under attack. Social Security was designed as one of those backstops. The traditional formula is the three-legged stool, Social Security being one leg, savings being another, and then a pension plan being the third. Generally speaking, that system still works, even in a mobile workforce, if you have plans in place that are adequate. But when you move from employer to employer, some employers don’t even provide a sufficient or a matching 401(k) plan. And if Social Security is weakened, then nothing is going to work for those people.
Aldeman: What about those people who work for ten or 15 years in a defined-benefit plan that aren’t fully reaching the normal retirement age, and not staying for a full career, and not in Social Security either? Do you think that the current system is serving them well?
Low: If you’re not in Social Security, and you only work for 10 years, there’s no system that’s going to work well for you, unless you’re making a lot of money. The reality is in order to retire, with some level of financial security, you have to put in a full career of work. If you don’t have Social Security, then you have to make up for that, potentially one-third of your income, by making more or saving more. So again, I don’t think it’s the system. There are certain people based on their circumstances that they’re not going to make it through retirement, they’re going to run out of money. If you don’t have Social Security, in a fifteen year career, the average worker is not going to save up that much money. If you have no pension, or a very small pension, you’re going to be in trouble.
Aldeman: Yes, my question was about people who are working another job but only worked ten or fifteen years toward a pension. Let’s say they teach for ten or 15 years, and then they go into the private workforce. So they don’t have a large pension from the public system, they have a modest one, and then they don’t have Social Security for those years either.
Low: That person if they worked another career in the private sector then they would have Social Security from the private sector. They’ll have whatever they’ve saved up during all those years, and they’ll have a relatively modest pension. If you worked for fifteen years as a teacher, you’re going to get 30 percent of whatever you were making for the rest of your life. I would say for having worked in the public sector as a teacher or something else, you’re going to be better off than another worker who didn’t have that pension.
Aldeman: Some states have allowed public sector employees to choose what type of retirement plan they want to enroll in, whether it's a defined benefit plan or a defined contribution plan. California has this to some extent, they allow some part-time teachers to opt into a cash-balance plan, but they automatically enroll full-time teachers into a defined-benefit plan. Would you support allowing employees to make a choice or expanding that choice to more types of workers?
Low: It’s depends on what the choices are. If you’re going to give people a variety of solid options, we would, of course, consider giving people choices. But if you’re going to give them a choice between good and very bad options, we don’t think that’s a wise way to go.
Aldeman: In addition to traditional defined-benefit plans, what other good options could you foresee?
Low: I’ve seen hybrid plans that offer a combination of defined-benefit and defined-contribution elements. Even in a defined-contribution plan, the choice of whether it’s good for you or not is going to depend on, number one, how much is your employer going to put in? Because if the employee is putting in all the money, or the vast majority of it, that’s probably not going to end up being very good for them. What are the investment options available? What kind of education is provided? Because most people aren’t very financially savvy, and they often make very bad choices. To me, you have to provide a choice of well-thought out and well-designed plans.