I usually allow letters to the editor stand for themselves, but I’ll make an exception for Gary Ravani’s letter in Friday’s paper (You can read the full letter here). Ravani, a longtime leader of the California Federation of Teachers, addressed a Fed report that detailed the wealth lost by the middle class during the Great Recession. In particular, he said:
“The article detailed the evaporation of middle class wealth and that the ‘promise’ of a secure retirement built on the stock market proved ‘illusory.’ Isn’t one recommendation to make public pensions more 401(k)-style, stock-market-based systems? To make public employee pensions also insecure and ‘illusory’ is moving us forward economically?”
Ravani overlooks or ignores the fact that public pension funds are invested in the stock market, just like 401(k) contributions. The only difference is that taxpayers are on the hook if pension fund investments lose value or even fall short of their targeted gains.
The retroactive pension increases authorized in 1999 for CalPERS members (a group that doesn’t include public school teachers) were based on a promise that investment earnings would cover the full cost. They didn’t, of course, leaving taxpayers to make up the difference. The cost is being counted in billions, and it’s still growing.
Until 1984, the big California public pension funds were required to put most of their assets in low-risk (and therefore low-yield) bonds, just as Social Security contributions are invested in government bonds rather than stocks. The pension funds couldn’t invest in stocks at all until 1966. In 1984, Proposition 21 removed the cap on stock investments by CalPERS and CalSTRS, the pension fund for California public school teachers. The funds were freed to bet as much as they want on the market. That, in turn, made it easier to promise larger benefits on a retroactive basis. Make a bad bet? No sweat. The taxpayers will pay you back.
That indemnification feature, of course, has been missing from proposals to put Social Security money into the market. No gambling with the house money.
So, should we get rid of pensions for public employees? I don’t think so. I like the federal system – a small (relative to state employees) pension, a 401(k)-style savings system and Social Security. Ravani says private sector pension systems are terrible. He’s right. But let’s not kid ourselves. A system that allows, even encourages, big bets on big returns in the market to pay for pensions that can match or exceed working income, with a guarantee that any investment losses will be made up by the taxpayers, isn’t sustainable, and it isn’t a model for the private sector. It’s not working for the public sector, either.
- Jim Sweeney