For most Americans these days, timing is everything when it comes to retirement.
At the moment, it looks like those who recently retired or who are on the cusp of retirement may have picked a bad time to be born. For them, the steep drop in the investment markets caused by the coronavirus pandemic came at just the wrong moment.
History tells us that the markets will recover and that cycles of ups and downs are inevitable. But under a retirement-security system that relies upon individual accounts – 401(k)s – many of those whose retirement coincides with a down cycle will not be around long enough for their savings to fully recover.
There is a way to flatten to curve. They’re called pensions – collective retirement savings systems into which workers of all ages and their employers contribute and which have professionally managed, diversified investments. They are built to withstand the extremes of economic cycles.
Those who receive pension benefits during down times receive no less income. Those who receive benefits during boom times receive no bonus. That’s what flattens the curve.
Regrettably, fewer than 5 percent of private-sector workers today are able to participate in a pension fund.
In the wake of this latest market spiral, one might expect to see renewed public discourse about our national failing to address retirement security. Instead, what we’ve seen so far is a new round of alarmist attacks on public sector pensions.
It is true that public-employee pension funds, including CalPERS and CalSTRS in California, have seen the point-in-time value of their investments decline. Especially given the uncertainty about the ultimate course of this pandemic and its effect on the economy, it is far too soon to tell how deep and long-lasting the effects on markets will be. But the expectation that investments will experience times of negative returns is inherently built into fund planning.
Unlike personal accounts in which short-term timing is everything, what matters for pension funds is the long term. Over the last 10 years, CalPERS’ annual returns have averaged 9.1 percent. Over the last 30 years, it’s been 8.1 percent – and, remember, that 30-year period includes the disastrous financial meltdown of 2008, during which the S&P 500 fell by 44 percent over two years.
For critics to try to sound an alarm about the stability of pension funds based on one or two months of data is not just foolish, it’s irresponsible.
Those critics have been careful to avoid mentioning the significant steps that were taken after the Great Recession to further fortify the pension system: for all employees hired since 2013 benefit formulas have been reduced, retirement ages increased and pensionable compensation capped. In addition, most public servants must pay at least half of the monthly contributions needed to fund their pensions.
Further, the pension funds have also reduced their assumed annual rate of return to guard against overly optimistic projections.
Also ignored by the critics is the fact that the economic benefits of California’s pension funds will be especially valuable as the state recovers from an anticipated recession.
During the fiscal year that ended in 2018, a recent study showed that CalPERS retirees – who, on average, receive about $3,000 a month –collectively generated $23.5 billion in economic activity in California, supporting 137,000 jobs. An earlier study by CalSTRS found that its benefits generate $11 billion in annual economic activity, supporting 92,000 jobs.
That economic driver will continue to provide a boost to California’s economy, especially in smaller communities where the relative impacts are most substantial.