The long, arduous and often contentious journey of public pension reform has reached a major milestone. The Legislature has approved and sent to Gov. Jerry Brown a comprehensive pension reform package based on the governor's plan that he unveiled nearly a year ago.
The reforms are being criticized as inadequate or insignificant by critics of public pensions. Some public employee groups are blasting the reforms as overly severe. When both sides of a contentious issue criticize the same reforms, it's often a sign that a reasonable compromise has been reached.
Most everyone can agree that the goals of pension reform are to reduce costs to ensure the long-term sustainability of pensions and to provide adequate retirement income to workers who have dedicated their careers to serving the public. The reforms approved last week generally appear to accomplish these goals.
A preliminary cost analysis by our actuarial staff estimates that the reforms will save California taxpayers $42 billion to $55 billion over 30 years for CalPERS plans alone. CalSTRS, the California State Teachers' Retirement System, estimates savings of nearly $23 billion over 30 years. These are real and significant savings.
New public employees will receive less generous retirement benefits and they will have to work longer to receive them. Most workers will have to work until age 67 to receive full benefits. Police and firefighters will have to work until age 57 to receive a maximum benefit that is less than what most safety workers currently receive. The amount of salary that qualifies for pension benefits will be capped at $110,000 a year for workers who are covered by Social Security and $132,000 for those who are not. This will virtually eliminate the few extravagant pensions that some find so offensive.
Other cost-saving measures include using the highest average three years of pay to calculate pensions, instead of one year, to reduce pension spiking. Only regular, recurring base pay can be used for pension calculation purposes. Padding pension benefits with overtime pay, special bonuses, vacation or leave cash-outs, and other types of extra pay will no longer be permitted.
New employees will be required to pay at least half the cost of their pensions. Current employees who are not paying half may be required to pay more in the future. Retroactive benefit increases for prior service and the purchase of retirement service credit for time not actually worked will be prohibited. Those who are convicted of a felony on the job will lose their pensions from the date they committed the crime.
State employees and workers in more than 200 CalPERS-affiliated cities, counties and other public agencies have already agreed to significant pension reforms over the past few years. The state reforms alone saved taxpayers $400 million in the current fiscal year. The new statewide reforms will save significantly more money, add protections to the system, prevent abuse and result in greater consistency of pension benefits from local to state government.
The reforms roll back benefits to levels in effect prior to SB 400, which was passed in 1999 and increased benefits for past as well as future service. Many have criticized CalPERS for its role in the passage of SB 400, as a sponsor of benefit increases. Today we are a different organization, and we have played a significantly different role. We have provided extensive technical support and costing information. From a policy standpoint, many of the reforms protect the system and prevent abuse for example, prohibiting pension holidays and retroactive increases. We do not sponsor legislation that affects benefit levels. That role belongs to the Legislature, the employer and the employee.
CalPERS administers pension plans, and it is our role to make good on the promises made by the Legislature and at the bargaining table between employees and state and public agencies. The reforms will significantly reduce public employee retirement costs while preserving traditional pensions. Studies have shown that traditional pensions are nearly half as expensive as 401(k)-style retirement plans for providing the same level of benefit to retired workers.
Pension reform is hard work. If it were easy, as the saying goes, it would have been done a lot earlier. The legislative leaders and stakeholders involved in the pension reform process have done extraordinary work. They have produced a set of reforms that moves us forward to having a stronger and more affordable system. While the reforms may not satisfy those on each extreme of the spectrum, they are a positive and significant step in ensuring that public pensions are sustainable, secure and cost-effective.