It is possible to reform public employee pensions in California easily and legally – in a way which preserves existing pension benefits and makes existing pension systems solvent. How? Cap new top public employee pensions at $100,000 a year.
As public employee advocates often point out, the average annual public employee pension in the state is, at present, about $40,000 a year. But this figure includes individuals who worked many years ago and who did not work many years beyond the minimum for vesting in pension systems. Public employees who now retire after 30 or more years of service typically receive, on average, about $70,000 a year in pension benefits.
As high as this figure might be, the real problem in public employee pensions is the explosion in the “$100,000 Club” – the geometric acceleration of the number of public employees in the state who are retiring with pensions of $100,000 or more a year. In 2005, fewer than 2,000 retirees received pensions of $100,000 or more from the California Public Employees’ Retirement System. By 2009, there were more than 6,000. At the end of 2013, there were almost 17,000.
These 17,000 retirees alone receive more than $2 billion a year in pension benefits. By 2020, it is projected that more than 50,000 CalPers retirees will receive more than $100,000 a year in pensions, and the total cost of just these 50,000 pensions will exceed $6 billion annually.
That’s not sustainable.
Similarly in other public employee pension systems, including the California State Teachers’ Retirement System, the number of pension recipients receiving $100,000 or more each year is increasing exponentially.
Together, CalPers and CalStrs serve about 3 million members, including about 1 million members and beneficiaries who currently receive benefits. Projecting forward to 2025, as hard as it might be to believe, the typical new CalPers retiree will receive a pension of $100,000 a year. By 2030, the $100,000 Club will have grown to more than a half-million members, and the total cost of the $100,000 Club would be in the vicinity of $70 billion a year. By 2040, the typical new CalPers retiree could receive as much as $200,000 per year, and the total annual cost of the $100,000 Club could be $150 billion, just for CalPers.
That’s not sustainable, either.
The answer is clear: Cap new public employee pensions at $100,000 a year. This would resolve the public employee pension crisis in the state and make every public employee pension system in the state solvent.
How could this practically be accomplished? My organization, the California Center for Public Policy, is spearheading efforts to develop a state constitutional amendment initiative that could appear on the November 2016 ballot that would limit the maximum initial pension for public employees under 50 at the time of the initiative’s passing to $100,000 a year. Thereafter, retired public employees’ annual pension would increase with cost-of-living adjustments, but the maximum initial pension, for employees under 50, would be $100,000.
By capping initial annual pensions at $100,000 for new retirees under 50, the total cost of public employee pensions in the state would decrease by about one-half in 30 years.
Importantly, the proposal being developed by the CCPP would not affect pension benefits already earned, nor would it affect existing pensions. Rather, neither public employers nor public employees under age 50 would be able to make payments into pension systems that would result in initial pensions greater than $100,000 annually. No existing benefit would be lost by any employee – the only limitation would be on the ability to earn future initial benefits above $100,000 a year.
In 2012, former Los Angeles Mayor Richard Riordan proposed a pension reform initiative in the city of Los Angeles. More recently, former San Jose Mayor Chuck Reed has led pension reform measures at the state level. Perhaps these two former mayors – one a Republican and the other a Democrat – could be enticed to support a state constitutional amendment along the lines here indicated, together with others in the state from a variety of political perspectives and a broad spectrum of interests.
Public employee pension reform should unite everyone and is in everyone’s interest – Democrats, Republicans and independents; advocates of public services and proponents of lower taxes; and private and public employees. Indeed, by making pension systems solvent, public employees would gain more from pension reform than anyone else.
The California public employee retirement systems were never intended to provide hundreds of thousands of retirees more than $100,000 a year in retirement benefits, but this is the system we are creating. Capping new public pensions at $100,000 a year for employees under 50 would solve the state’s public employee pension crisis.
Lanny Ebenstein is president of the California Center for Public Policy, a statewide think tank based in Santa Barbara. He also teaches economics at UC Santa Barbara.
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