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California’s CalPERS Pension System – Navigating Troubled Waters

California’s Pension Predicament

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California faces a pension challenge as changing demographics and a weak economy threaten the stability of the state employee pension system. Economists are raising concerns about the future of CalPERS, the nation’s largest public pension fund.

Structural Questions and Investment Concerns

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Questions arise about CalPERS’ structure and the recent poor performance of its investments. Meb Faber of Cambria Investment Management criticizes the time and money spent on managing the fund without yielding desired results.

CalPERS’ Massive Role

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CalPERS manages about $465 billion in assets, providing retirement and health benefits to over 2 million members. Its role is crucial for many California state employees.

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The Unfunded Liability Issue

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As of June 30, about 28% of what CalPERS owes to its members is unfunded, presenting significant financial challenges.

Complex Investments and Fees

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Faber points out the complexity of CalPERS’ structure and its investments in private funds, highlighting issues with fee calculations and investment strategies.

The Burden of Rising Costs

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In fiscal year 2022–23, CalPERS paid $31.1 billion in benefits, a $2 billion increase from the previous year, attributed to cost-of-living adjustments and a growing number of retirees.

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Demographic Shifts Adding Stress

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An aging workforce is causing financial stress on the system. The ratio of employees contributing to the fund has dropped by 40% since 2001.

California’s Aging Population

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The number of Californians aged 65 and older has grown significantly, further impacting the pension system’s sustainability.

Fewer Workers, Greater Liabilities

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With declining birth rates and longer lifespans, there are fewer employees to support the pensions of previous generations, leading to increasing unfunded liabilities.

CalPERS’ Investment Returns Falling Short

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The fund’s investment returns have consistently fallen short of the required 7% annual target, with recent reports showing gains of only 5.8%.

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Balancing Environmental Goals with Investments

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CalPERS faces challenges in aligning its investment strategies with environmental goals, including decisions on fossil fuel investments.

Criticism of Investment Strategies

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Critics argue that CalPERS’ investment strategies and portfolio diversification are not yielding the expected returns.

The Venture Capital Debate

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CalPERS’ venture capital investments are under scrutiny, especially in the context of recent market trends and the collapse of banks with significant venture capital investments.

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Economic Fluctuations and Opportunities

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Marcie Frost, CalPERS CEO, acknowledges the challenges posed by high inflation and interest rates but sees them as opportunities for long-term investment strategies.

Addressing the Funding Shortfall

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CalPERS faces a significant funding shortfall, with options to resolve it including increased contributions from the state and individual employees.

Pension Challenges Beyond California

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California’s pension issues are part of a larger national context, with many states facing multibillion-dollar pension deficits.

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