Structural Issues and Poor Investment Performance
The California Public Employees’ Retirement System, known as CalPERS, is grappling with challenges that threaten the stability of the state’s largest public pension fund.
With approximately $465 billion in assets under management and responsibility for the retirement income of over 2 million members, CalPERS faces a daunting task.
In recent years, questions have arisen about the structure of the system and its disappointing investment returns.
Meb Faber, co-founder and chief investment officer of Cambria Investment Management, expressed frustration in a November report, stating that much time and money spent on complex investments have yielded poor results.
Rising Costs and an Aging Workforce
CalPERS has been facing increasing costs, with $31.1 billion in benefits paid to around 800,000 retirees in the fiscal year 2022–23, marking a $2 billion increase from the previous year.
Officials attribute these rising costs to cost-of-living increases and a growing number of retirees. However, an aging workforce exacerbates the financial strain on the system.
As the ratio of employees paying into the fund decreases when retirements surge, fewer members are contributing revenue, resulting in a 40 percent drop in the ratio since 2001.
The changing demographics of California, including a growing population of residents aged 65 and older, have further strained the system, leading to expanding unfunded liabilities.
Investment Performance and Environmental Initiatives
The financial health of CalPERS depends on investment returns exceeding 7 percent annually. However, the fund has consistently failed to achieve this target, reporting gains of 5.8 percent for the most recent fiscal year after a 6.1 percent loss in the previous year.
Critics have raised concerns about the fund’s investment strategies and underperformance compared to industry benchmarks.
Additionally, CalPERS has faced questions about its commitment to environmental agendas, such as climate issues.
Some argue that these efforts should be more substantial, while others claim that decisions like partial divestment from fossil fuels are negatively impacting investment returns.
Calls for Efficient Management
With nearly 3,000 employees managing the pension fund system, some have suggested that investments could be handled more effectively. Critics argue that over-diversification and inefficient strategies are plaguing the fund, leading to unnecessary costs for pensioners.
Unpredictability and Increasing Liabilities
Rising interest rates and falling real estate prices have added unpredictability to CalPERS’ investments. High inflation and interest rates create both uncertainty and opportunities for the fund.
However, officials stress the importance of long-term investment strategies to navigate market fluctuations.
Furthermore, the potential for unfunded liabilities to increase remains a concern. This year’s shortfall, totaling approximately $245 billion, represents about a 10 percent increase from the previous year.
Addressing this shortfall may require increased contributions from both the state and individual employees.
A Manageable Challenge
While CalPERS’s financial situation raises concerns, some experts believe that the issue is manageable. They point out that California is not alone in facing significant pension debt, with several other states also grappling with multibillion-dollar deficits.
In summary, CalPERS is facing challenges due to changing demographics, an aging workforce, poor investment performance, and environmental initiatives.
The fund’s long-term financial health relies on effective management and strategies to address rising costs and unfunded liabilities.