In a recent op-ed for The Sacramento Bee, Ted Toppin, the chairman of Californians for Retirement Security, argues that traditional pension plans help “flatten the curve” and are “built to withstand the extremes of economic cycles.”
Unfortunately for Californians, the required contribution rates into two the state pension plans covering teachers, firefighters, and police officers—CalSTRS and CalPERS—have been rising for two decades, and will have to rise again in the wake of the coronavirus.
What will the current market downturn mean for those plans? It’s still too early to know for sure, but in a new piece for The 74, I look back at what happened to CalSTRS in the last recession:
Between declining assets and rising liabilities, CalSTRS went from being 89 percent funded in 2007 to 67 percent funded in 2012. Its unfunded liabilities — the gap between what it had saved and what it owed to current and future retirees — grew from $19 billion to $71 billion.
Rather than seizing the opportunity to consider alternative models, California legislators hunkered down with a number of small changes. Like most states, California made its pension benefits worse by creating a new, less generous tier of pension benefits that applied only to new hires. For those workers only, California raised the retirement age by two years.
The state also increased contribution rates required of teachers themselves, as well as state and district budgets. In legislation passed in 2014, the state scheduled CalSTRS contribution rates to slowly ramp up from a total of 18.3 percent in 2014 to 35.3 percent in 2020-21.
CalPERS has pursued similar changes, but neither plan is prepared for the coming recession. Across both plans, the state had an unfunded liability totaling $246 billion as of last April. That figure is surely much higher today. Just like in the last recession, costs are likely to trickle down to workers and taxpayers through higher contribution rates—not to mention less money available for all other public services.
In short, the California pension plans have not yet flattened their curves. Workers and taxpayers will suffer the consequences.