Review “Actual” gross rates of return vs. “Net” rates of return. Payouts vs. Contributions.
Note that payouts are projected based on “Participants expected salary at time of retirement”. Actuarial projections are set on the projected cost basis “at time of retirement” and not what the participants salary is today. Projections are made 25-30 years out.
EXAMPLE: New participant’s salary today $45,000 and projected at retirement in 30-years $135,000 and thus on the projected cost basis the fund’s liability is substantially higher.
INTENT: The bigger the fund balance, the bigger the power base held under management.
CAFR1
Also, keep in mind the fund is “strictly participatory”. It is like buying a train ticket to ride from NYC to LA, CA. NYC (retirement) and LA, CA (when you die). With a train ticket, when you get to LA, CA would you try to walk off with the seat and the fire extinguisher on the wall? No you would not. You do not own one piece of the train, you just had a ticket to ride. As is the case in most large local government pension fund systems, the participants just have a “ticket to ride” under contract and do not own 1c of the fund’s balance. The local governments participating own 100% of their share in the funds balance.
As was the case at the end of 2008 with the real-estate bubble burst and severe downturn in the economy that followed, California local government laid off 12,000 employees that now, poof, disappeared from the retirement system liability figures.
1. How many billions in liability just evaporated with that layoff?
2. Did local governments pull the now surplus equity from the pension system accounts they were participating in?
3. When the economy improved 2010 to 2015 and local governments “re-hired” did they replace the money they pulled or did they just start a-new with the new-hires and new actuarial projections per the fund’s balance needs to be fully funded at cost projections for those new-hires at time of retirement?
The above three questions are very relevant as to “how” this retirement system is operating.
** For 2007, 2008, 2009, and 2010, note total participants vs. fund liability. Do the math as to what effected the fund’s ending balance.
Was it market profit / loss, more / less participants, local government fund withdraws from the Retirement System?
When a local government needs some cash, do they just lay off employees and make a withdraw from the substantial revenue which now is no longer a liability that local Government holds in a local government Retirement system account?
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2015 CalPERS CAFR – https://www.calpers.ca.gov/docs/forms-publications/cafr-2015.pdf
Review “Actual” gross rates of return vs. “Net” rates of return. Payouts vs. Contributions.
Note that payouts are projected based on “Participants expected salary at time of retirement”. Actuarial projections are set on the projected cost basis “at time of retirement” and not what the participants salary is today. Projections are made 25-30 years out.
EXAMPLE: New participant’s salary today $45,000 and projected at retirement in 30-years $135,000 and thus on the projected cost basis the fund’s liability is substantially higher.
INTENT: The bigger the fund balance, the bigger the power base held under management.