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Actuarial experts say that if the pension system falls below the 50% threshold, it will be very difficult to get back on track. Without sufficient funding, the system runs the risk of an economic death spiral. In other words, a system that relies on a return on investment to survive requires money to invest. As the old saying goes, it costs money to make money. How dangerous is it? To make an outlook, consider the possibility that investment losses will plunge system assets to less than 50% of what should be on hand to cover the cost of already earned pension benefits.ĥ0% is important, but is considered a somewhat arbitrary benchmark. The board rejected it and instead chose a higher risk option. This is because, in general, the higher the return, the higher the risk of higher losses.Īlternatively, board members were told that they could lower the target to 6.5%, keep risk low, and ask public employers and employees to make more money. If you want to reach your 6.8% target, you need to shift your investment and take on more risk. However, board members were told by current experts that the current portfolio could only achieve an annual return on investment of 6.2% over the next 20 years. Now that the board has begun to set investment return targets, the CalPERS policy, which led to strong market performance last year, has automatically reduced the previous target from 7%, which was set four years ago, to 6.8%.
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Instead, our children and grandchildren are supposed to pay a portion of the labor costs of the public services we enjoy today. However, if these investments go awry, the shortfall will essentially turn into long-term debt and must be covered by current and future generations of taxpayers.Įmployees do not bear the burden.
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Therefore, there is great political pressure to keep the contribution of employees and employees low by artificially keeping the return on investment forecast high. However, the more the system requires public authorities, the less money is available for employee salary increases and other government operations. The less money a retirement plan expects to receive from investment returns, the more it needs to be sought from employers and sometimes workers to ensure that the plan is financially stable.