03/29/2024

Pension Loan would Cover Up Wealth Transfers to Employees

California proposes to issue a pension obligation bond to finance extra contributions to the state pension fund, CalPERS. It would also cover up wealth transfers from citizens to state employees. Here’s how it works: When pension promises are made by the state to its employees, both the state and employees incur costs (“Normal Costs”) in the form of contributions to CalPERS with the hope that the sum of contributions and investment earnings will be sufficient to fund the promised pension payments. If investments earn at the rate CalPERS used when setting the Normal Cost, everything works out. But if investments earn at a lower rate, deficits (“Unfunded Liabilities”) arise. In contrast to joint sharing of Normal Cost, employees don’t share in the cost of Unfunded Liabilities. 100% of that cost falls on citizens, whose services get crowded out and taxes get raised to pay off the liabilities.

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