The honchos at the California Public Employees' Retirement System are in hot water again. Higher-than-expected claims and lower-than-expected returns on investments have forced the CalPERS board to raise premiums for its long-term care insurance by a whopping 85 percent.
Policyholders are understandably upset. Back in the go-go '90s, when CalPERS was actively hawking what was then the relatively novel insurance product that provides nursing home and assisted living care, it led customers to believe that premiums would never rise. In fact, as The Bee's Jon Ortiz has reported, a 1998 sales brochure strongly suggested just that. "With this option, your plan is designed to remain level and won't increase each year," the brochure promised.
CalPERS actuaries were as wrong about long-term care as they were when they told the Legislature the next year that substantially increasing public employee pension benefits would not raise costs to state and local governments. When the stock market tumbled, employer pension costs soared. So have premiums for long-term care insurance.
Unlike public pensions, long-term care insurance policies are not guaranteed by the government, which means by taxpayers. So when claims began to soar and investment returns plummeted, policyholders were on the hook. Premiums have risen steadily in recent years but not high or fast enough to erase the growing unfunded liability. To correct that, the CalPERS board voted in December to raise premiums 85 percent. The increase, set to begin in 2015, would be spread over two years.
But the retirement system is offering policyholders a reasonable alternative, a long-term care policy that is less rich. The new policy will provide cheaper 3, 6 or 10-year options instead of the lifetime benefit most policyholders bought back in the '90s and early 2000s. By converting to the less rich options, CalPERS officials say, policyholders' premiums will not increase and in some cases might even be reduced.
For retirees facing a near doubling of their long-term care premiums, the alternatives make sense. The claims history shows that the average person needs nursing home care for only 3 1/2 years. And, less than 1 percent of claimants live more than nine years in a nursing home or assisted living facility. By offering the more reasonable alternatives, CalPERS has made long-term care policies more affordable, increasing the likelihood that younger and relatively healthier people will buy them, thereby expanding the risk pool. That's a good thing.
Still, early buyers of CalPERS' more expansive long-term care policies feel burned and with good reason. While there was no guarantee, CalPERS created an expectation that the cost of this extraordinary benefit would remain flat forever. It was a reckless promise, indicative of reckless management that previously ruled CalPERS. The adjustment now under way is not only necessary but long overdue.