Agency Unsustainability

The average amount California sets aside from public employee payrolls and invests into CALPRS and CALSTRS each year is about 16% of each active employee’s salary. This money is invested by CALPRS and CALSTRS all over the world. In fact, a CALPRS representative once boasted for the record that “20% of our fund we invest in California!” The other 80% is invested globally.

The reason the globalized nature of these public pension funds – as well as the amount on top of salary (16%) set aside each year – is relevant is because they are not financially sustainable without massive tax increases to make up shortfalls. Sustainability is more than a principle to be engineered into green technology – sustainability is a force that will asset itself in all things. Sustainability applies, either by design or correctively, in everything from economics to population demographics. For example, any sustainable human population will end up being elderly. Read “Sustainable Demographics.”

We make much of Social Security and Medicare ending up insolvent in 30-40 years, but we think nothing of public employee pension funds, far more lavish, that face insolvency any day now. And 16% set aside is not nearly enough, when one considers social security sets aside around 12%, for a retirement security that is well less than half as good, probably more like a quarter as good as a typical public employee pension.

It’s not that all Americans shouldn’t get this lavish benefit, we enjoy perhaps the highest worker productivity in the world, but what is feasible? CALPRS and CALSTRS have been earning something like 8% real returns with their globalized retirement funds, and they think they can sustain this. They can’t. It’s difficult to say what a sustainable rate of return is, but in the USA, for example, real GNP growth has been more like 3% per year. While we have seen impressive gains in China and India, it is not prudent to assume that 8% real returns in any portfolio this big can be sustained. Investment portfolios controlling assets representing wealth at this scale – funds that are themselves equivalent to the GNP of the USA – cannot over time earn returns greater than the real growth rates of the economies in which they invest.

And forget about CO2 taxes to rescue the solvency of public agencies who have awarded unsustainable future benefits to their workforce. Sustainable security is for everyone. In any nation, it’s only fair that public workers and the private taxpayer workers who support them should both get the same deal. And the deal will need to be sustainable – if you want to allocate 16% of salaries to public sector pensions, increase social security payments to 16% of payrolls, and take away the $91K ceiling on assessments. And assume a 4% return on funds invested – and see what you can offer every American.

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