TCS Daily

A Tale of Two Pension Systems

By Noel Sheppard - January 28, 2005 12:00 AM

This past December, outgoing California Public Employees' Retirement System President Sean Harrigan, along with many of his fellow trustees, voted to aggressively oppose President Bush's Social Security reform. In doing so, the board vowed to use the fund's political might -- with $178 billion in assets and 1.4 million members -- to campaign against any plan that changes the nation's retirement system.

Such opposition is quite daunting, for, as stated by the San Jose Business Journal, "When CalPERS, the nation's largest public pension fund in the country, speaks, shareholders and boards of directors listen."

But a few weeks later, according to the Business Journal Governor Schwarzenegger announced his own proposal to enact an overhaul of the very program that these folks oversee:

        "Gov. Arnold Schwarzenegger has endorsed a constitutional amendment 
        that would end pensions for state workers hired after July 1, 2007, and 
        instead offer them a defined-benefits plan. The aim is to reduce the state's 
        pension costs, which have grown from $200 million annually in 2001 to 
        $2.3 billion this year. Whether the plan would do that is a matter of debate, 
        but if the state shifts its pensions to 401(k)-like plans, it would eventually 
        put CalPERS out of business."

As one looks closely at these events, as well as the battle lines drawn over revamping the nation's two largest retirement systems, they seem inextricably linked. As California typically leads the nation in all manner of cultural, societal, and legislative trends, the success or failure of Schwarzenegger's plan might presage the outcome of the president's.

As recently stated by New York Times columnist John Broder:

        "The outcome of the vote in California, pension experts and political 
        analysts say, will not only have an impact on the state pension system, 
        but will also provide an important marker of public opinion on proposed 
        changes to Social Security."

Supporting Broder's view is Stephen Moore, the president of the political action committee, the Free Enterprise Fund. According to the Times:

        "Mr. Moore, who has advised Mr. Schwarzenegger on economic policy 
        and participated in an independent audit of state finances last year, 
        said that California tends to lead the nation on social policy. If California 
        moves from a traditional defined-benefit pension plan to a 401(k)-style 
        defined contribution plan, the nation is likely to follow, he said

Schwarzenegger's proposal has strong Republican support in Sacramento, for the day after his announcement, Assemblyman Keith Richman (R-Northridge) introduced legislation that would require state and local workers hired after July 1, 2007 to only be eligible for 401(k) plans.

In addition, the Howard Jarvis Taxpayers Association -- the powerful anti-taxation lobby named after the creator of California's sweeping 1978 property tax reform, Proposition 13 -- is crafting an initiative that would bring this matter to a statewide vote.

The thought of this issue being put on the ballot thereby allowing Californians to dictate the future of the state's pension plan without the legislature running interference must be keeping CalPERS officials awake at night. Surely none of them wants to battle the highly popular and charismatic Governator at the polls where he has been hugely successful in his brief stint in office.

As a result, CalPERS quickly added a page to its website called The Pension Debate Information Center opposing privatization -- even though this might be against state laws governing the use of public funds for campaign issues. To counter these efforts, according to the Sacramento Bee, Assemblyman Richman has filed a complaint with acting CalPERS President Rob Feckner asking for the site's closure, and is threatening to bring the matter up for an investigation by Attorney General Bill Lockyer:

        "As a government agency, they are not allowed to use their Web site to 
        do political campaigning. It's a campaign Web site (whose) entire focus is 
        to stop what they self-describe as the largest threat to CalPERS," said 
        Daniel Pillissier, spokesman for Richman.

All of which leads one to ponder the possibility that this entire script was written months ago by President Bush and Governor Schwarzenegger when the latter agreed to campaign for the re-election of the former. Such an alliance might have formulated a strategy whereby these public pension changes would be addressed concurrently, maximizing efforts to get both proposals passed. In return, not only would the Governator save billions of dollars in future CalPERS expenditures which would assist him in balancing budgets to come, but also would grease the wheels for the transfer of federal funds that California desperately needs.

Given all the discussion in the Golden State recently concerning the 77 cents that California receives from the federal government for each dollar of taxes it sends to Washington, it is conceivable that in exchange for the Governator's buy-in to further the president's aggressive Social Security agenda, Schwarzenegger has been promised a greater amount of federal assistance with his gubernatorial fiscal difficulties.

As a state that hasn't voted for a Republican presidential candidate since Bush 41 defeated Dukakis in 1988 -- as well as possessing two of the most staunch opponents to the current Bush agenda in Senator Barbara Boxer and House Minority Leader Nancy Pelosi -- California has not been high on the national Republican party's list of financial recipients. A successful CalPERS privatization that leads to Social Security reform could change all that. As a result, the attainment of a restructured CalPERS could have much more sweeping effects on the future of California and our nation than is currently apparent.

Noel Sheppard is an economist and writer residing in Northern California. He welcomes your comments at



TCS Daily Archives