The California Public Employees’ Retirement System (CalPERS) today released its cost analysis of major provisions of the pension reform proposal introduced by Senators Berryhill, Cannella, Emmerson and Harman. The proposal, Senate Constitutional Amendment No. 13 (SCA 13), contains many elements similar to Gov. Jerry Brown’s pension reform proposal.
The cost analysis found the proposal will lower retirement benefits for new hires and shift risk from employers to employees. It will also reduce costs for state, school, and local public agency employers.
The actuarial analysis was prepared at the request of, and used assumptions and plan design features specified by, the staff of the Senate Republican Caucus. It focuses on a proposed hybrid retirement plan for new hires as specified in SCA 13. A hybrid plan combines a traditional defined benefit (DB) pension plan with a defined contribution (DC) component similar to a 401(k) retirement savings plan. The hybrid plan is designed to provide workers with a retirement benefit that – combined with Social Security, if applicable – is equivalent to 75 percent of their highest average pay over three years.
CalPERS analysis also includes a discussion of other provisions of SCA 13 in Attachment 5. This includes a provision which would require additional member contributions under certain circumstances and which would also save significant costs for employers.
Key findings of the analysis:
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The expected savings for state retirement plans range from no savings for some bargaining units to savings of up to 2.2 percent of payroll for other groups. For school employers, cost savings are expected to be about 3.1 percent of payroll for new employees. For local public agencies cost savings will vary significantly but are generally expected to be greater than the state.
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For the defined benefit pension component, the lower benefit formula proposed for miscellaneous workers covered by Social Security is expected to result in a normal cost of 4 percent to 4.2 percent of payroll. For safety workers not covered by Social Security, the normal cost is expected to be 14 percent to 16 percent of payroll. The normal cost would be split evenly between the employer and employee.
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For the defined contribution component, a total contribution of 6.8 percent of salary would be required for miscellaneous members and 11 percent of salary for safety members. Under the parameters given by Republican Caucus staff, the state would contribute 2 percent of pay for miscellaneous workers and 4 percent of pay for safety workers. The employee would be expected to contribute the balance.
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The proposed hybrid plan will result in a shifting of risk from the employer to the employee. The employer will see reduced risk in the form of a smaller, less volatile defined benefit pension. The worker will see increased risk because the defined contribution portion of their benefit is not guaranteed due to investment return volatility.
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Under the proposed hybrid plan, the total retirement benefit provided to workers would be lower, in general, than the benefits currently provided to new hires.
The CalPERS analysis of SCA 13 did not include additional costs associated with administration of a hybrid plan or the costs related to possible closing or scaling down of the current defined benefit pension plan. A staff analysis issued in March 2011 entitled “The Impacts of Closing the Defined Benefit Plan at CalPERS” discusses those impacts. A copy of that study is available online at www.calpersresponds.com.
CalPERS, with assets of $236 billion, is the largest public pension fund in the U.S. It administers retirement benefits for more than 1.6 million California state, local government, and public school employees, retirees, and their families on behalf of more than 3,000 public employers; and health benefits for more than 1.3 million enrollees. The average CalPERS pension benefit is $2,332 per month. The average benefit for those who retired in the most recent fiscal year that ended June 30, 2011, is $3,065 per month. More information about CalPERS is available at www.calpers.ca.gov.
Additional Resources
Cost Analysis for Senate Constitutional Amendment 13 (PDF, 719 KB)
