The California pension crisis is a real problem that’s impacting millions of California retirees with pensions. For those under 65, the pension something to look forward to… as a reward for years of hard work and service. For those 65 and older, it is now an important aspect that governs the quality of everyday life.
For individuals, both young and old, pensions are something that gain in importance as time marches on. With each passing year, news reports become more consequential, and on that critical birthday – somewhere north of 55 – the evening news suddenly becomes directly tied to your personal income.
This is especially true for those living in California. Kitchen table issues are now directly tied to state and city budgets and a flood of wavering pension plan reports detailing contributions, obligations and…ahem, potential “adjustments.”
Pensions and Formulas
Conceptually, pensions are simple to understand. Payments “in” are made by recipients over the years and payments “out” are calculated by a vast array of financial strategies for the overall pension fund that – in the end and over time – determine how much you will get and when.
This all works pretty well, until one or more of these strategies doesn’t quite perform as planned. It could be anything from not enough people paying in, to having inflated expectations of future returns. In the case of big financial events like the 2008 recession, an investment fund can see setbacks which take decades to recover from.
Whatever the reason, those in charge of doling out your pension payments are also, at some point, suddenly in charge of the quality of your everyday life.
And again, this is especially true for those living in the pension crisis found in California.
Snapshot for the Golden State
Today, there are an estimated 40 million people living in California. The State Controller’s Office reports that 4.6 million – or about 11.5% – are members of public pension plans, administered by either state or local governments.
About three-quarters (76%) belong to the “big three” state programs – the California Public Employees’ Retirement System (CalPERS), the California State Teachers’ Retirement System (CalSTRS), and the University of California pension system – and the remaining 24% belong to over 100 local, special district, and other smaller public pension plans.
But they all have one thing in common: more money must go in… than goes out… or it’s trouble. Simple as that.
Input Versus Demand
Earlier we mentioned “investment fund” and “contributed during one’s working life.” Seems therein lies the problem… a big looming problem… and more so, the question of what to do about it.
In 1970, the number of California residents 65 and older was only 9%. Today, it is over 15% (i.e., 6-million-plus) and growing at a rate of 2% a year and is estimated to reach 21% (or one out of every five residents) in the next ten years.
Conversely, there are declining numbers of younger workers around to support the steadily increasing number of aging public employee retirees receiving (or about to receive) benefits. Case in point, in 2001 there were two active members contributing to CalPERS per retiree; In 2015, the ratio dropped to 1.3 active members contributing per retiree.
The undeniable result? Fewer active members contributing and longer-living retirees receiving benefits can only result in one thing – higher unfunded liabilities and darker days just around the corner.
Shortfalls and Solutions
It’s reported that California state and local governments face more than $400 billion in unfunded liabilities for public employee retirement benefits, broken up into two areas: $254 billion in pension liabilities and $147 billion in retiree health care.
Both CalPERS and CalSTRS funds are reported to have assets worth only 70% of what they will owe over time to California public employees and retirees.
According to the Public Policy Institute of California, they have reported gaps of more than $138.9 billion and $107.3 billion respectively between their estimated obligations to retirees and the current value of their assets.
Both pension funds further acknowledge that they expect to earn less money over time from their investment portfolios, thus causing need to raise the rates they charge to members and other government agencies.
As a result, smaller local government agencies and some school districts are struggling to keep up with the steadily climbing payments to the California Public Employees’ Retirement System. And when a city pays higher pension contributions, there is in turn, less money for public services – such as road maintenance and public safety.
Eventually, without financial solutions, public services are overwhelmed and cut while employees are laid off and/or the city simply files bankruptcy. Scary business at best. However, this is simply the tip of the iceberg for California and its retirees.
The Looming Crisis
At a hearing before the California Supreme Court on Dec. 5, 2018, Gov. Jerry Brown pointed to a deep and worsening public pension crisis many have called a “ticking fiscal time bomb.”
The looming crisis is real and growing. Quoting from a Commission report, Gov. Brown noted “California’s pension plans are dangerously underfunded… the result of overly generous benefit promises, wishful thinking and an unwillingness to plan prudently.”
“Unless aggressive reforms are implemented now,” he added, “the problem will get far worse.”
A Brown-proposed new pension law now under consideration also requires that public employees hired after Jan. 1, 2013, contribute more money toward their retirement and eliminates generous benefits the state gave to public workers during the exuberance of the dot-com boom of the late 1990s.
“In order to meet and maintain today’s defined benefits,” Brown noted, “there has to be the power of management to make modifications.” And there it is… those potential “adjustments” mentioned earlier.
In another news conference last year, while unveiling his 2018-19 Budget and forecast for the future, Brown stated, “When the next recession comes around, the governor will have the option of considering pension cutbacks for the first time in a long time.”
California’s Perfect Storm: The Undeniable Pension Crisis
As if dire pension crisis statistics and gloomy retirement predictions are not enough, Californians of all ages face still more challenges.
There are also inflated (and wildly fluctuating) real estate prices, crowded freeways, rising taxes (both state and local), floods, fires and earthquakes to deal with, to name but a few – each impacting lives in their own specific ways and collectively resulting in a rapidly diminishing lifestyle overall.
It is a perfect storm that has many Californians, both young and old alike, thinking about relocating. A recent statewide survey found that more than 60 percent of residents feel that the best days of living in California are behind instead of ahead. A surprising 53 percent of Californians also said they are seriously considering moving out of the state in the next five years – up from 49 percent just a year ago.
To underscore this point, for many years more people have been leaving California for other states than have been moving there. For example, according to data from the American Community Survey, from 2007 to 2016 the state lost one million residents to domestic migration – about 2.5 percent of its total population – with five million moving in while six million moved out.
Today, the numbers of those leaving California for greener pastures continue to steady tick upwards. It also begs the question, “where are they headed – and why?”
As for “where,” the nine states that have no income tax – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming – are favored by retirees, with the nearby tax-free states getting the lion’s share of California’s exodus.
A study completed by Retire Better Now, which looked at the impact of moving to a state with no income tax, found the average retiree withdrawing $5,500 per month could save roughly $7,680 per year in state income tax by moving to Nevada. Over a 25-year retirement, that’s $192,000 in savings – just one of the many reasons why nearby Las Vegas has become a favorite for relocating California retirees.
Las Vegas Beckons
While it is said that “What happens in Vegas stays in Vegas,” in reality, today it is more “What is ‘happening’ in Las Vegas has people deciding to ‘stay’ in Las Vegas.”
“The migration from California is steadily increasing and a lot of people are leaving because of the pension crisis,” notes Ty Fischer, Founder and CEO of Retire Better Now, “While California is pushing people out, Las Vegas continues to draw them in with everything from no state income tax and more ‘bang-for-the-buck’ on the price of homes to new hotels, professional sports teams, a new stadium and a bigger convention center… just to name a few… and with that comes more jobs, more businesses and a booming economy.”
Fischer also adds, “Las Vegas is also extremely ‘retiree friendly,’ with an endless array of restaurants and entertainment… many of which offer super discounts for everything from lavish buffets to great shows of all types… including famous performers.”
“It’s also great for those who love to spend more time with friends and family. Mention Las Vegas, and watch their eyes light up… those who’ve moved to Las Vegas often report seeing their loved ones more than ever before,” notes Fischer.
One more nice aspect, Las Vegas is only a few hours away by car – and even less on short flights from the world-class McCarran International Airport in the center of town – which makes it easy to see and keep in touch with friends one has made over a lifetime.
Today there is a steady migration from California, with thousands leaving in cars, aboard planes and in trucks loaded with entire households… all headed directly to Las Vegas… and many with just one thought in mind – to retire better now.
Just because California is having a crisis – pension or otherwise – doesn’t mean you have to as well.
Don Logay is an award-winning journalist and luxury lifestyle writer. Former Editor-in-Chief of three national magazines with numerous BPA (Business Press Association) awards for Excellence in Journalism. He began his career as Writer, Director and Producer of business theater and entertainment services for Fortune 500 companies worldwide. After living in Orange County, CA for more than twenty-years, Don now lives in Las Vegas, NV.
The information provided is for informational purposes only. It should not be considered legal or financial advice. Retire Better Now™ does not make any guarantee or other promise as to any results that may be obtained from using this information or our services. To the maximum extent permitted by law, Retire Better Now™ disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable. Content contained on this website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Use this information at your own risk.