Defined Benefit Pensions: A modest model for economic growth and stability
by Catherine D. Alexander
Silicon Valley, California – November 17, 2010
CalPERS, one of the largest public pension funds in the United States, currently has $221 billion in assets(1), with 10.2%(2) of these assets invested in California businesses.
First approved by California voters in 1930 as the State Employees’ Retirement System (SERS) in an amendment to the State Constitution, the state worker retirement program was enacted in 1931 when a California state law was passed to provide a retirement plan through investment in bonds.
In 1939 the California State Legislature passed a bill which also allowed cities, counties, and school districts to participate in SERS. By 1952 the fund was allowed to invest in real estate under a new state law.
The Public Employees’ Medical and Hospital Care Act (1962) expanded benefits further to include health care coverage. By 1967 SERS was contracting with 585 public agencies for retirement benefits. A ballot proposition led to a new 1967 state law changing the name of SERS to PERS, the Public Employees’ Retirement System.
The California version of the fund, officially renamed CalPERS, was protected from California State budget deficits by Proposition 162, the “California Pension Protection Act of 1992,” which insured that the Board of PERS would hold sole responsibility for managing and directing PERS assets. Under the direction of the PERS Board, PERS funds have grown to a $221 billion fund which supports retired teachers, librarians, nurses, social workers, and other government workers.
In November 2010 CalPERS Facts at a Glance(3) listed the number of retirees at 492,513 members, with those members still active (working) and inactive (not working) at 1,134,397. Total members (of both types) are listed at 1,626,910 in the state of California. Of the retiree group, 31% are state employees, 38% are school employees, and 31% are local public agency employees (counties and cities). Employee contributions for fiscal year 2009 totaled $3.8 billion, with $6.9 billion coming from employer contributions.
According to CalPERS, the average monthly service retirement allowance for all member retirees is $2,188(3) for those with an average service of 19.6 years. The average monthly service retirement allowance for school members is $1,192, with an average service record of 16.8 years. The average monthly service allowance for state workers is $2,499, with their average service around 23.1 years. Most covered members worked to age 60, disabled workers retired, on average, at age 52, and those with an industrial (work-related) disability retired at age 49.
Most astonishingly, 78% if all service retirees receive $36,000 per year or less, with the average CalPERS retiree (at $2,188 per month) living well below the poverty level in California, according to the 2009 – 2010 Federal Poverty Level Chart for Presumptive Eligibility (PE), if that income supports 2 or more in the household(4).
Likewise, an October 10, 2010, New York Times article by Alexandra Zavis (5) stated that “For California’s elderly, federal poverty is anything but realistic.” In the article Zavis highlights a recent UCLA study which reveals that “most older Californians, those 65 or older, need at least twice the income calculated by the federal government to make ends meet — $21,763 a year on average for a single person renting a one-bedroom apartment, or $30,634 for a couple.” According to UCLA’s figures, most CalPERS workers are living at or below the poverty level.
Working Partnerships USA concurs. In their recent, Life in the Valley Economy: Silicon Valley Progress Report 2010, they state that the percentage of workers covered by unions dropped from 20.1% in 2008 to 17.5% in 2009(6). Since public employee unions have traditionally supported adequate pensions and wages, the Progress Report authors found that union employees were 50% more likely to have employer-provided health coverage and 96% more likely to have a retirement plan than non-union workers.
WPUSA also noted that safety nets for seniors were rapidly dissolving, with the California budget possibly eliminating CalWORKS and CAPI, ending assistance to 41,180 residents, 97% of whom are older adults over 60 and receiving CAPI benefits(7). CAPI (Cash Assistance Program for Immigrants) recipients may also be eligible for Food Stamps, Medi-Cal, Special Circumstances, and IHSS, and must be non-citizen residents of California to receive benefits.
Ironically, loss of health benefits, pension income, and area services to seniors would place greater pressure on city, county, and state-run facilities, like county hospitals, clinics, and social services, resulting in cost overruns for those services whose budgets are already facing massive cuts, particularly in 2012.
WPUSA’s findings show that “nearly half of all Santa Clara County seniors (48.4%) are economically insecure, with incomes too low to meet their basic needs without assistance(6).” Adding to these shortfalls, inflation increased 0.7% in Silicon Valley, while it decreased -0.4% elsewhere in the nation, with the number of households with incomes below $10,000 increasing by 76%, as Silicon Valley households which were normally considered to be middle class, continued to shrink. Because of this, 67% of adults delayed or avoided receiving needed healthcare, while 47% of those going hungry were inadequately compensated if attempting to work. The number of food stamp recipients in Silicon Valley has more than tripled since 2001, with 5.1% of valley residents on some type of food assistance. Of those recieving assistance, 92% were born in the United States and two-thirds of that group were children.
Since many CalPERS retirees must remain near their former worksites to receive local health benefits, the Silicon Valley region presents a frightening paradigm for other regions in the state which have a traditionally smaller tax base with which to fund services and infrastructure. Retired professional workers like teachers, social workers, librarians, clercial staff, and others, traditionally have worked extra hours to cover economic shortfalls after retirement. Those options have been cut as well.
According to the U.S. Census Federal Aid to States Report for Fiscal Year 2009: Issued August 2010(8), Federal contributions to state agencies like Transportation, Housing and Urban Development, Agriculture, Health and Human Services, and Education are steadily increasing, with Alaska, Wyoming, and New Mexico far outpacing other states in federal aid received. Federal aid by major program areas increased for “other programs” and Medical Assistance, while it has remained almost flat since 1981 for Highway Trust fund and Family Support Payments (TANF). Again, Alaska, Wyoming, and New Mexico far outpaced other states in terms of Federal aid received.
Currently, the U.S. Department of Health and Human Services 2009 Poverty Income Guidelines for Family Size indicate that in 1984 an individual would be at poverty level with an annual income of only $4,980. USDHHS suggests that the poverty level increases only $5,850 in 36 years, growing to an adjusted figure of $10,830 for one individual in 2010 (9).
Likewise, Minimum Wage increased from $3.35 per hour in California and $3.35 nationally, to $8.00 in California and only $6.55 nationally in 2008, then 7.25 nationally in 2009(10). Those wages compute to a $15,080 gross annual income across the country and only a $16,640 gross annual income in California.
With the annual gross figures above divided by 12 months, our average CalPERS school system retiree s at $1,192 is not only living at poverty level, they are not achieving a California or national minimum wage figure after years of retirement contributions, which would reach an annual minimum wage level with a $1,386.67 monthly gross retirement benefit, before taxes.
The Center on Budget and Policy Priorities suggests that the worst recession since the 1930’s has decreased tax revenues 8.4% between 2008 and 2009, plus an additional 3.1 decline in 2010. Likewise, federal aid to states from the 2009 Recovery and Reinvestment Act and the Jobs Bill from August 2010, has eased state cuts and tax increases. Monies from these aid bills total $60 billion for 2011, so future aid money is projected to drop to only $6 billion remaining in 2012. State budget shortfalls are expected to surpass $140 billion in 2012.
Former Secretary of Labor, Robert Reich, Chancellor’s Professor of Public Policy at the University of California at Berkeley, states that the first draft of President Obama’s deficit commission report places undue emphasis on reduction of the federal budget deficit (and debt), without balancing it with a relationship to the size of the economy. For example, Reich states that “In 1945, the national’s debt was 120 percent of GDP. That proved to be no problem in later years, not because the debt shrank but because the economy grew.(12)
Reich’s comments suggest that Defined Pension Benefits aren’t the culprits of local economic shortfalls, but instead add to a region’s financial stability with a steady infusion of cash at the local, business level. What does hurt economic growth is inadequate reinvestment of wealth and a shrinking of the middle class, some of which we have seen since the mortgage crisis and the economic downturn it precipitated, slowing the economy and creating double-digit unemployment.
Reich also suggests that an extension of jobless benefits will infuse the economy with cash for spending, encouraging an economic turnaround which traditionally occurs when the middle class feels confident that there will be enough funds to consistently pay for housing and basic survival needs. One could say the same for defined benefit pensions and government retirees, since the Wall Street mortgage crisis destroyed the 401k’s of many non-government workers who will have to extend their working lives or go on assistance if they are no longer able to work.
According to Reich, “Extending the Bush tax cuts for the wealthiest 1 percent would cost an estimated $120 billion over the next two years. That’s more than another unemployment benefit extension would cost….Moreover, the top 1 percent spends a small fraction of their income….A labor department report shows that for every $1 spent on unemployment insurance, $2 are spent in the economy.(13)” Again, these figures apply similarly to those receiving defined benefit pensions.
The California State Auditor Report 2008-603 Summary: February 2009 would seem to agree with Reich’s analysis. “The state’s revenue structure, which depends to a large degree on personal income taxes, is very sensitive to changes in the economy. As a result, decision makers tend to be constantly reacting to boom and bust cycles of the economy(14).”
Wall Street, not Main Street workers, created one of the most catastrophic economic downturns since the Great Depression.
In “Too Big to Fail: the inside story of how Wall Street and Washington fought to save the financial system-and themselves,” Andrew Ross Sorkin, a New York Times award-winning chief mergers and acquisitions reporter, amplifies the role of Wall Street in precipitating the loss of middle class workers’ homes, jobs, and retirement 401k’s, in the great mortgage meltdown of 2008:
▪ Former Goldman Sachs CEO, Henry M. “Hank” Paulson, Jr., who was secretary of the Treasury under George W. Bush, received over $18.7 million in cash bonuses and was the highest paid CEO on Wall Street at $38.3 million in total annual compensation, during his final year on Wall Street (15).
▪ Richard Grasso, former NYSE Chairman received a $190 million “payday.” Grasso and Ken Langone, another Wall Street financier, were later sued by New York Attorney General, Elliot Spitzer, for deception and a “rigged compensation formula.”(16). Spitzer stated that “This is not an issue that is limited to the New York Stock Exchange….but found in formulas for setting corporate executive pay which are ‘unsavory’ and filled with ‘misinformation, flawed information, and self-dealing.'”
▪ Warren Buffet, long respected for his value-based investing strategies, related dismay at “paying out $900 million in bonuses at Soloman” and was stunned when John Gutfreund, the firm’s chairman who allegedly developed mortgage-backed securities , “demanded $35 million just to walk away from the mess he had created.”
Bloomberg also reports that in 2007 Goldman Sachs “set a Wall Street pay record when it set aside $20.2 billion for compensation, including $16.9 billion in the first nine months. (Lloyd) Blankfein, 55, was awarded a $67.9 million bonus that year, an all-time high for a securities firm CEO. It included $26.8 million in cash and $41.1 million in restricted stock and options.(17)”
On June 9, 2008 Joe Bel Bruno wrote, “Lehman Brothers raising capital after posting billions in losses,” a story about Richard Fuld, chairman and CEO of Lehman Brothers USA, who attempted to raise $6 billion dollars to shore up that investment house after posting $3 billion dollars in first quarter losses.(18) Lehman attempted to insure Collateralized Debt Obligations (CDO’s, or sliced and diced mortgage debt products sold to other investment houses) with AIG, rather than increase asset liquidity levels, as required by the Federal government for solvency.(21)
In the latter story, Brad Hintz, a former CFO with Lehman, stated that the firm held $130 billion in residential and commercial real estate assets which the firm sold during that quarter. “Those sales triggered billions of dollars of gross mark-to-market adjustments or accounting changes to the value of assets, since the beginning of last year.” Hintz believed that the price discounts would set a precedent causing a modest domino effect at other firms, like Merrill Lynch, Morgan Stanley, and Goldman Sachs.
Further, David Einhorn of Greenlight Capital believed that Lehman misstated its earnings during the first quarter of 2008. “Lehman is raising $6 billion that they said they didn’t need to replace losses that they said they didn’t have….A preliminary analysis….suggests that there are still unrecognized losses on the (Lehman) balance sheet.”
Additionally, Lehman was swindled out of $355 million, apparently by two Marubeni Bank employees who allegedly forged Lehman documents and signatures on the same weekend in which Lehman announced its massive quarterly losses.
On Monday, September 15, 2008, Lehman planned to file for chapter 11 bankruptcy protection(19), listing banking debts of $613 billion, bond debt of $155 billion, and $639 billion in other assets. As a result of the Lehman failure, the Dow Jones plummeted over 500 points, with the government proping up AIG, Lehman’s CDO mortgage product insurer, just a few days later.(21)
Robert Reich suggests that closing a Federal tax loophole could prevent hedge-fund and private equity managers from treating their earnings as capital gains taxed at 15%, rather than as income, which is taxed at 35%. He further states that in 2009 the most successful hedge-fund managers earned $1billion dollars each, with one hedge fund manager earning $4 billion dollars.
Wall Street lobbyists, as well as wealthy private hedge-fund managers, notably Paul Allen and Henry Kravis, have been advocating preservation of this 20% tax loophole for the wealthiest in our society. According to Reich, Paul Allen, who is one of the wealthiest men in the world, owns a personal yacht with two luxury submarines and a helicopter.
Reich views this tax loophole as a $20 million subsidy for billionaires (21). In addition to the $700 billion TARP bailout of the the nation’s financial instutions, and the federal purchase of hundreds of billions in mortgage-backed securities, mortgage-based products were created to raise Wall Street profits, at least on paper, as the assets themselves never existed in any tangible, physical form, so any value was purely subjective.
Ironically, our Federal Reserve Notes (and currency) are not tied to the value of Gold in our U.S Treasury, as this value basis was eliminated in 1933 (22). Our monetary system is based on the power of trading risks and future values, which mortgage bankers used to their advantage in leveraging more assets than they actually owned. (Our only financial guarantees exist as $250,000 depositor insurance at FDIC insured banks, which are backed by the United States government.)
As Reich states, “A billion dollars would pay the salaries of about 20,000 teachers(13).” In addition, a 35% tax on the wealthiest one percent of Americans and on those receiving the $700 billion TARP payments, as well as some Wall Street-paid reparations to those Americans who lost their jobs, homes, and 401k’s due to Wall Street excesses in unsecured mortgage-based investment products, salaries, and bonuses, would allow every working American the security of lifelong healthcare and a defined benefit pension, in their own modestly financed home. That security for the middle class would fund a stable economic model of financial recovery.
(1)”CalPERS Assets.” CalPERS. http://www.calpers.ca.gov/index.jsp?bc=/investments/assets/mvs.xml
(2)”CalPERS Investments in California’s Economy.” CalPERS.http://www.calpers.ca.gov/index.jsp?bc=/investments/assets/califinvestments.xml
(3)”CalPERS Facts at a Glance.” CalPERS, November 2010.http://www.calpers.ca.gov/eip-docs/about/facts/retiremem.pdf
(4) “2009 – 2010 Federal Poverty Level Chart for Presumptive Eligibility (PE) and Instructions.” http://www.dhcs.ca.gov/services/medi-cal/eligibility/Documents/FPL%20Chart%20for%20PE.pdf
(5) “For California’s elderly, federal poverty level is anything but realistic.” Alexandra Zavis, New York Times, October 17, 2010.http://www.latimes.com/news/local/la-me-elderly-poverty-20101017,0,2492753.story
(6) “Life in the Valley Economy (LIVE) Silicon Valley Progress Report 2010.” Working Assets Report, 125 pp., June 2010.http://www.wpusa.org/live2010/live2010Full.pdf (pages 27; 33; 53-54; 55; 59)
(7) “Cash Assistance Program for Immigrants (CAPI).”http://www.cdss.ca.gov/cdssweb/PG42.htm
(8) “U.S. Census Federal Aid to States Report for Fiscal Year 2009: Issued August 2010.” http://www.census.gov/prod/2010pubs/fas-09.pdf
(9) “National poverty Income Guidelines by Family Size.” U.S. Department of Health and Human Services.http://www.dof.ca.gov/HTML/FS_DATA/LatestEconData/documents/Bbpovertyguideline.xls
(10) “Minimum Wage History.” California Department of Industrial Relations.http://www.dof.ca.gov/HTML/FS_DATA/LatestEconData/documents/bbminwage.xls
(11) “States continue to feel recessions impact.” Center on Budget and Policy Priorities, October 7, 2010. http://www.cbpp.org/files/9-8-08sfp.pdf
(12) “Why we should beware: budget-deficit mania.” Robert Reich, November 11, 2010. http://robertreich.org/post/1549020696
(13) “Why the Lame Duck Congress must extend jobless benefits for hard-hit families but not tax cuts for the rich.” Robert Reich, November 17, 2010.http://robertreich.org/post/1601480347
(13) “The challenge of closing tax loopholes for billionaires.” Robert Reich, June 1, 2010. http://robertreich.org/post/654200536
(14) “Report 2008-603 Summary: February 2009. High Risk: The California State Auditor has designated the state budget as a high-risk area.” California State Auditor: Bureau of State Audits. http://bsa.ca.gov/reports/summary/2008-603
(15) “Too Big to Fail: the inside story of how Wall Street and Washington fought to save the financial system-and themselves.” Andrew Ross Sorkin. 2009: Penguin Books. http://www.andrewrosssorkin.com/
(16) Spitzer Seeks $100M from Grasso: New York Attorney General announces sweeping lawsuit seeing return of some $187M pay package.” Krysten Crawford, CNN Money. May 24, 2004.http://money.cnn.com/2004/05/24/markets/spitzer_grasso/
(17) Goldman Sachs’s Top Managers to Get All-Stock Bonuses (Update3). Christine Harper, December 10, 2009. Bloomberg.com.http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aZZpuBhMHTbo
(18) “Lehman Brothers raising capital after posting billions in losses.” Joe Bel Bruno, January 9, 2008. Huffington Post.http://www.huffingtonpost.com/2008/06/09/lehman-brothers-raising-c_n_106000.html
(19) “Lehman Brothers Holdings Inc. Announces It Intends to File Chapter 11 Bankruptcy Petition”. Lehman Brothers Holdings Inc. 2008-09-15.http://www.lehman.com/press/pdf_2008/091508_lbhi_chapter11_announce.pdf
(20) “Wall St.’s Turmoil sends stocks reeling.” Alex Berenson, September 15, 2008. New York Times.http://www.nytimes.com/2008/09/16/business/worldbusiness/16markets.html
(21) “Credit Crisis – Bailout Plan.” July 12, 2010, New York Times.http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/bailout_plan/index.html?scp=1&sq=tarp%20funds&st=cse
(22) “FDIC Insurance coverage basics.” Deposit Insurance – Federal Deposit Insurance Corporation. http://www.fdic.gov/deposit/deposits/insured/basics.html
(All online stories were accessed 11/11/2010 to 11/17/2010.)