Earlier this year, a bombshell was dropped when it was reported that California’s Public Employees’ Retirement System (Calpers)—the largest public pension fund in the U.S.—earned only 0.6% on its investments last fiscal year.

 

Pension Bubble Pension ChallengesWhy is this such a big deal, you ask? Well, because, in order to meet their long-term obligations in the form of pension benefits promised to millions of state employees depending on those checks coming in every month during retirement, Calpers needs to be returning over twelve times that amount.

“This is a significant policy issue for us,” said Calpers’ Chief Investment Officer Ted Eliopoulos since, Bloomberg writes, “the system must average at least 7.5 percent a year to match its assumed rate of return or turn to taxpayers to make up the difference.”

And that’s likely what’s going to happen since the problem is only getting bigger and bigger.

Given the importance of this issue, we recently spoke with Lawrence McQuillan, author of California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis, who explains why this is a ticking time bomb with real consequences for millions of Americans.

Here’s some of what he had to say on our podcast (lightly edited):

How does Calpers only earning a 0.6% return in the last fiscal year line up with the problems you lay out in your book?

That result that came out of such a low return on their investment portfolio shows just how poorly they calculate their target rates that they want (and need) to earn…and what that means is the unfunded liability keeps getting larger and larger with taxpayers having to bail them out with bigger and bigger contributions. Ultimately, the current situation is unsustainable…

Berkshire Hathaway, Warren Buffett’s firm, offers a defined benefit pension plan where they assume close to a 6% rate of return and this is run by one of the best investment gurus in the nation. At 7.5%, Calpers and Calsters and all the giant pension funds around the country are essentially expecting that they are going to outperform Warren Buffett by at least 25% year after year after year. I mean it’s just insane and it’s not going to happen…

There are so many political shenanigans and games that are being played here that allow these funds to be constantly mismanaged year after year and, as a result, the total unfunded liability in California—just California alone—is $950 billion all-in when looking at state and local pension plans. So it’s a huge mountain of debt that keeps getting bigger every year because they’re not putting in enough money given the actual returns that they earn.

And that’s just California—If you look nationally and use realistic numbers, it’s about $4 trillion when looking at all state and local government pension plans across the country. This is a huge ticking time bomb and it’s starting to explode in certain parts of the country already…

Right now, this is sort of growing under the radar and it’s only when you hit tipping points, unfortunately, that the general public really recognizes the extent of the problem and is then willing to act. Take Detroit, for example, where largely that bankruptcy was being pushed along by unaffordable pension costs—there were other factors as well but that was one major factor—and then, ultimately, it brought the city to its knees…

And then we saw it spread. It spread from Detroit to Vallejo, Stockton, and San Bernadino…three cities that went bankrupt largely over unaffordable pension costs and now there’s talk of other cities, possibly Los Angeles and Chicago and New York and Philadelphia—all which have major unfunded public pension debt problems…

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