Report: California must raise retirement age, contributions to save pensions

Its report, “Addressing California’s Pension Shortfalls: The Role of Demographics in Designing Solutions,” states that raising the retirement age and increasing employee contributions are only the first steps in addressing the state’s looming public pension shortfall. 

In short, demographic shifts are colliding with baby boomers who are nearing retirement and expected to live longer. The combination makes it harder for the state to follow through on promised benefits. 

“We’re talking about a perfect storm: more state services needed for an aging population, a workforce that will spend more years in retirement than they did contributing to the funds and a smaller ration of working-age taxpayers and contributing state workers to pay for it all,” said Perry Wong, the report’s co-author, in prepared remarks. 

“We’re only starting to feel the squeeze now, but every year that we wait to tackle the issue, it gets worse and progressively harder to address,” he added.

California is typically known as a harbinger for what the rest of the country will experience in the not-too-distant future. The report also comes on the heels of protests in France against a two-year increase in the retirement age. 

Other key findings in the Milken study include: 

– Currently, the average state employee contributes to the pension system for 25 years, but will receive benefits for 26 years. As longevity improves, the benefit-receiving years will increase.

– The pension liability in 2009 was $3,000 for each working-age adult in the state. By 2014, it will triple to over $10,000 per working-age Californian.

– In approximately three years, obligations for California’s three major state pensions will be more than five times as large as total state tax revenue. 

– Not only will California’s growing senior population depend on Medi-Cal and other state services, but public school enrollment is likely to rise in the coming years. This will add pressure to state legislators in terms of where to spend the revenue that is collected.

To combat these issues, the report suggests raising the retirement age and simultaneously increasing employee contributions. It also suggests moving pensions to hybrid plans that incorporate 401(k)-type programs that define contributions and not benefits. 

Absent swift action, “California is on a perilous fiscal course,” the report states.

“[Kicking] the can down the road only allows the problem to grow in magnitude,” it states. 

The full report is available at www.milkeninstitute.org.