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CalPERS Pensions vs Social Security PowerPoint Presentation

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CalPERS Pensions vs Social Security Presentation Transcript

Slide 1 - CalPERS Public Pension vs. Social Security Gaetan Lion, August 18, 2022
Slide 2 - Introduction The California Public Employees' Retirement System (CalPERS) is an agency that manages pension and health benefits for more than 1.5 million California public employees, retirees, and their families. In fiscal year 2020–21, CalPERS paid over $27.4 billion in retirement benefits,[and over $9.74 billion in health benefits. CalPERS manages the largest public pension fund in the United States, with more than $469 billion in assets under management as of June 30, 2021. Employees covered by such State public pensions are most often not covered by the Federal Social Security program. Within this presentation I will compare the retirement benefits of a CalPERS pension vs. Social Security. But, first I will describe the two different pension retirement programs separately. 2
Slide 3 - Social Security 3 I will focus on 4 different salary levels: $50 K, $75 K, $100 K, and $140 K. The current limit of salaries covered by Social Security is just a bit above $140 K. I will also look at different retirement ages: 62, 67, and 70. All estimated calculations were generated using the Social Security Quick Calculator https://www.ssa.gov/OACT/quickcalc/
Slide 4 - 4 As you retire later, Social Security replaces a rising percentage of your salary. If you make $50 K and retire at 62, Social Security replaces only 24.4% of your salary. If you retire at 70, it replaces 44.2% of your salary (top blue line).
Slide 5 - 5 Social Security is very progressive. It replaces a far lower percentage of salary for high earners at $140 K vs. lower earners. The difference is quite dramatic if you focus on the $50 K level on the left vs. the $140 K level on the right.
Slide 6 - 6 An individual wanting to replace about 30% of his salary could retire as early as 64 if he makes $50 K. However, if he makes $140K, he would have to retire at 70. This is another illustration of how progressive Social Security is.
Slide 7 - CalPERS Pension 7
Slide 8 - 8 CalPERS Pension basics To calculate the salary replacement rate for a CalPERS pension you just need to know: Age at retirement Benefit factor Years of service The above components are encapsulated within CalPERS pension formula that is often simply referred to as “2% at 62.” 2% at 62 simply means that someone retiring at 62 would have a benefit factor of 2% per year. And, if he had 30 years of service, his salary replacement rate would be: 2% x 30 = 60%. The benefit factor increases with age and so does the salary replacement rate. On the next page, the table indicates that the salary replacement rate can reach 100% for the ones who retire at 67 with 40 years of service associated with a benefit factor of 2.5%. Indeed, 2.5% x 40 = 100%.
Slide 9 - Source: Retirement Formulas and Benefit Factors _ State Miscellaneous & Industrial Member – 2% at 62. CaLPERS February 2021 9
Slide 10 - Comparisons 10
Slide 11 - Social Security vs. CalPERS Pension at 58 with 20 years of service CalPERS pension at 58 with only 20 years of service has a salary replacement rate of 32% which is higher than any of the Social Security scenarios highlighted in green. 11
Slide 12 - 12 CalPERS pensions are far more generous than Social Security
Slide 13 - 13 CalPERS pensions are 2.5 x to 4.1 x more generous than Social Security For instance, someone making $140 K and retiring at 67 would have a salary replacement rate of only 24.9% with Social Security vs. 100% with a CalPERS pension.
Slide 14 - Funding considerations 14
Slide 15 - How are the programs funded Contribution by employee and employer as a % of payroll to finance pension Contribution multiple CaLPERS/Social Security Source: Schools Pool Valuation and Employer/Employee Contribution Rates. CALPERS, April 18, 2022 15 While the employee contribution as % of salary is not that different between CalPERS and Social Security; it is dramatically higher for the employer contribution (around 4 x higher).
Slide 16 - CalPERS projections of employer contribution rates are very volatile and swing with yearly stock market returns CalPERS Employer contribution Employer contribution CalPERS/Social Security multiple Source: Schools Pool Valuation and Employer/Employee Contribution Rates. CALPERS, April 18, 2022 Schools Pool Valuation and Employer/Employee Contribution Rates. CALPERS, April 19, 2021 16
Slide 17 - Special section: Impact of CalPERS Pensions on the Marin Municipal Water District (MMWD) 17
Slide 18 - Source: Comprehensive Annual Financial Reports for the years ended June 30 for the years 2015 to 2021. 18 CalPERS pensions represent an unsustainable financial burden for the MMWD Between 2015 and 2021, CalPERS pension contributions have risen from 23.3% to 38.7% of payroll. Even though yearly pension contributions have risen very rapidly since 2015, the MMWD is falling farther behind as unfunded liabilities keep on rising faster than its balance sheet.
Slide 19 - 19 If MMWD was treated as a Federal agency instead of a California State one … Reviewing impact on fiscal 2021 As shown, the CalPERS pension financial burden has a huge impact on the MMWD financial condition (in both terms of balance sheet leverage and profitability). And, fiscal 2021 was a relatively good year. I understand that fiscal 2022 was less profitable, and the impact of CalPERS pensions probably may have strained the MMWD to reach breakeven. Source: Comprehensive Annual Financial Reports for the years ended June 30 2021.
Slide 20 - 20 Additional reasons why the CalPERS pension burden is so high on the MMWD It uses an even more generous benefit formula. Instead of “2% at 62”, it uses “2.7% at 55”. I intuit that may be an older rule that is grandfathered… or maybe a rule applicable to State agencies instead of schools. It has only 227 employees to support 353 pensioners. The resulting Old-Age dependency ratio for the MMWD is 353/227 = 155% that is huge.
Slide 21 - 21 Considerations The financial burden associated with very generous CalPERS pensions on schools and State agencies is not a phenomenon unique to California and the MMWD. This is a nationwide phenomenon at the local and State levels. The financial burden falls on State taxpayers (income tax, property tax, sales tax, etc.). Financially strained school districts, and local & State agencies have to often raise funds through earmarked taxes such as parcel taxes to fund their basic operations. And, often the underlying causal financial strains are public pension financial burdens. The decisions to take State public employees out of the Social Security system were made a long time ago (during the first half of the 20th century). If we had kept everyone within the Social Security umbrella, municipal finances would have been on a far stronger footing.
 

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