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. 7/1/20061

2 The California Faculty Association presents… George Diehr Stand up to the Pension Privatization Gamble

7/1/20063 A group plan that serves us by managing: Our health insurance Our secure retirement program Investments of our pension money What is CalPERS?

7/1/20064 CalPERS is a healthy retirement system.

7/1/20065 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

7/1/20066 Retirement security is part of how we are paid in return for our service to California.

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8 Three-pronged attack 2005/06 budget proposal Bill in legislature: ACA 5 Ballot initiative

7/1/20069 These attacks would… End retirement security for new employees Increase paycheck deductions for all employees

7/1/ The claim that pension costs for the state are exploding and impossible to sustain is a myth.

7/1/ CalPERS’ Current Funded Ratio is Not Unusual Current ratio is 84% and climbing.

7/1/ 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. Figure 1

7/1/ Figure 3

7/1/ Current Rates are High, But Not Unprecedented

7/1/ Historical Rates with Proposed Stabilization

7/1/ These attacks on public retirement systems could cause a pay cut for employees of as much as 6%.

7/1/ The Budget Proposal would freeze the state’s share of payments for health insurance premiums.

7/1/ Plus, the bill and ballot initiative would end death & disability benefits for all employees and their families.

7/1/ 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/ 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/ 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/ 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/ 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/ “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/ Administrative costs DB plan (CalPERS) = 0.18% DC plan (typical 401k) = 1%+

7/1/ 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/ Example CalPERS Pension Benefit Common 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, % per year increase for inflation. Handout

7/1/ “Equivalent” Defined Contribution Plan Under 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 Requires contribution of over 21% of salary. AND: no benefit to survivor, no inflation protection, no death or disability benefit. Handout

7/1/ The average monthly benefit paid to a retiree from public service in California is $1,669.

7/1/ 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/ “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

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7/1/ 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/ Consider the Source '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”Conservative operative is in the right place at the right time”

7/1/ 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/ Be Informed. Get Involved. Resources & Contacts: George Diehr: CFA: CalPERS: AFL-CIO Center for Working Capital: RetirementSecurity.info