by Calpers is one of California’s benefit systems for state employees. Some common questions about Calpers include: How do they make money? What kind of benefits do they provide? Will Calpers run out of money? Through my research, I tried to answer these questions and more.
Contents
What is Calpers?
CalPERS provides and administers a variety of benefit programs and services in several areas including:
- Deferred Compensation (401K, 457)
- Disability
- Health
- Death
- Long-Term Care
- Retirement (Pension)
Source: Calpers
How is Calpers funded?
There is a common misconception that a pension is paid to retirees as “free” money. As if the taxpayer is paying the entire retiree’s paycheck.
The truth is that for every dollar that is paid to a retiree, 55 cents comes from investment earnings, 32 cents comes from CalPERS employers, and 13 cents comes from CalPERS members (i.e. the retiree during his/her working years).
You can almost think of it as a 401(k) with employer match, where the employer matches nearly 250% of your contribution (of course up to a limit).
While private employers typically offer perks which may include 401(k) matching, signing bonuses, and salary bonuses, public employers are known to offer pensions.
Benefits in the private sector and benefits in the public sector each have their pros and cons. Which do you prefer?
How many assets does Calpers have?
Calpers is holding onto almost $400 billion worth of assets by the end of fiscal year 2020.
Calpers Retirement Pension Benefits
How much does a Calpers pensioner make during retirement?
It all depends on when you started contributing to Calpers. If you joined Calpers 20 years ago, your payout will be different from someone who joined last year.
It also depends on what member category you fit into. Some member categories include:
- School Member
- State Miscellaneous & Industrial Member
- Staet Safety Member
- Local Miscellaneous Member
- Local Safety Member
Generally speaking, the sooner you joined Calpers, the better your benefits will be. Benefits for newer members tend to be less “generous” than those for older members.
Here’s the percentage of final compensation estimate for a State Miscellaneous & Industrial Member under the 2% at 55 formula for someone who joined state service about a decade ago:
Under this formula, you could retire with 100% salary at age 63 after putting in 40 years of service.
Here’s the final compensation estimate for a State Miscellaneous & Industrial Member under the 2% at 62 formula for someone who joined more recently:
Under this formula, you would have to work until age 67 to reach the same 100% salary after 40 years of service.
Source: Calpers Benefit factor charts
From Calpers’ 2019-2020 estimate, the average retiree receives about $38,000 a year after putting in just over 20 years of service.
Calpers Retirement Health Benefits
One benefit of staying under Calpers is that it will cover a portion (or even all) of your health insurance premium during retirement.
If you stay in state service for 10 years, Calpers will cover 50% of your insurance premium during retirement.
If you stay in state service for 20 years, Calpers will cover 100% of your insurance premium during retirement.
For every year between 10 and 20, Calpers will cover an additional 5%.
How Does Calpers Invest its Money?
Calpers invests both member and employer contributions into various assets such as public equity, global fixed income, real assets, private equity, and other.
What is Calpers’ return rate?
As of this writing, Calpers aims for a 7% annual discount rate, i.e. estimated rate of return.
Its actual return rates for the last ten fiscal years is shown in the figure below.
Why does Calpers aim for 7% when the stock market returns about 10% on average?
My guess is that Calpers seeks a risk adjusted return to fit its need of less volatility while simultaneously preserving capital growth.
A portfolio that was 100% stocks (i.e. S&P index fund) could see tremendous volatility during a market downturn, like when the S&P 500 lost almost 50% of its value between 2007 and 2009.
Drawdowns from such a beaten down portfolio during a recession to pay retirees would probably significantly hinder the portfolios future growth. Therefore, fund managers are probably accepting a smaller return in exchange for less risk.
What is Calpers’ budget?
Calpers budget for fiscal year 2020-2021 was about $1.6 billion, of which nearly 600 million went to operating costs and $1 billion went to fees.
It was interesting to me to see that Calpers had a $1 billion budget for fees.
However, I found out that Calpers managed $392.5 billion in 2020. That means it budgeted about 0.25% of its market value to fees.
0.25% is somewhat expensive considering that a Vanguard large cap index fund charges 0.04% and the most expensive Vanguard Target Date Fund VFIAX charges 0.15%.
I would guess that the some of the difference may be attributed to Calpers’ investments in real assets and private equity.
So while 0.25% sounds expensive, it’s probably pretty reasonable.
How does Calpers perform vs. S&P 500?
It is meaningless to compare Calpers against the S&P 500 because their risk profiles are different.
What matters are risk-adjusted returns.
Calpers takes on relatively less risk in exchange for less volatility but also smaller returns.
Whereas the S&P takes on relatively more risk in exchange for greater volatility and greater returns.
So how does Calpers’ returns compare to a portfolio of similar risk?
This is quite a difficult question to answer. Calpers presents its data in returns per fiscal year.
Most other funds report returns per calendar year.
Vanguard’s Target Retirement 2025 Fund (VTTVX) was a portfolio closest to Calpers’ portfolio I could find.
Here are VTTVX’s annual returns:
Comparing these numbers to Calpers’ would be an exercise in futility considering the end dates are different, report periods are different (fiscal year vs calendar year), and portfolio allocations are different.
To see how Calpers is really performing against a portfolio or similar risk would require more data and software. So unfortunately, my answer here is inconclusive.
Will Calpers be funded by the time I retire?
It appears that the fund has remained roughly 70% funded over the last 8 years.
Based on their estimates, the probability of its pension system reducing its funding to 50% is between 1% and 5% depending on the Plan, and less than 1% for falling below 40% funded over the next 30 years.
Calpers’ goal is to get to 100% funded. Will it ever reach its goal?
Its report says that if actual returns every year in the future were 7.0%, with other factors regarding temporary increasing of employer contributions, and eventual decrease of employee contributions, the funded status of all plans would gradually increase to around 100% over the next 25 to 30 years.
Funding Risks
Calpers faces several risks including being underfunded due to employers not making their contributions, low market returns, and employer defaults.
Some employers actually make additional contributions above the minimum required contributions. Why would they do that?
Calpers has educated the employers to ensure they understand some potential benefits to additional contributions including:
- Savings in interest and lowering the overall cost of their pension programs
- Lower risk of low funded status in the future
- Lower risk of high contributions in the future
Has Calpers ever missed a payment?
After searching through the Calpers website and Google, unfortunately I could not find a definitive answer.
Putting It All Together
So, to you nervous employees on the brink of retirement, or just people curious about pensions, the question of course is: Will Calpers run out of money?
Calpers is holding onto almost $400 billion worth of assets so it is doubtful that it will run out of money.
It is currently 70% funded, and is estimated to be fully funded in the next 25 to 30 years. It has less than a 1% chance that it would be less than 40% funded at ANY point in the next 30 years.
I would conclude that the future of the fund looks bright. So you can take a breath and relax.
But also continue to work hard for those you serve, and put in your years of service to enjoy your path to financial freedom!
