How Coiled Springs Turned 96% Into 69%
Or, How To Earn 7.8% for 20 Years But Fall Short $100 Billion
Board members at CalPERS and other public pension funds often mislead citizens about the reasons for rising pension costs and worsening Funded Ratios (the ratio of pension liabilities to pension assets) but the principal reason is surging liabilities.
In 1995 CalPERS reported a Funded Ratio of 96%. Over the next 20 years it earned a wonderful 7.8% compound annual rate of return. But its Funded Ratio fell to 69%. The reason: Pension liabilities grew faster, from $88 billion in 1995 to more than $430 billion in 2015. As a result, unfunded liabilities grew 25x, from $4 billion to more than $100 billion.
Public pension liabilities grow at super-high rates because public pension fund boards deliberately suppress their valuation when they are created, as explained here. Like a coiled spring, the more pension liabilities are suppressed when created, the harsher they snap back over time. The consequences fall hardest on young people as tax revenues go to old debts rather than new services. Every $100 billion in unfunded liability translates into $300 billion of cuts, tax increases or both.
New coiled springs are being created every day by self-interested public pension fund boards deceptively suppressing the valuation of pension promises. They should stop that practice immediately.