Consider a scenario where you serve as the CEO of a social services non-profit. Two decades ago, back in 2006, you committed to providing a $500,000 lump-sum retirement payout to a staff member in 2026. To fund this, both you and the employee agreed to evenly split an initial $112,000 contribution ($56,000 each). This sum was placed into an account overseen by an investment manager called “CalPERS,” who predicted that their projected investment returns would allow that initial amount to grow into the full $500,000 by 2026.
Fast forward to 2026, and the account holds only $419,000, leaving an $81,000 deficit for the newly retired individual. This shortfall occurred because CalPERS failed to hit the investment targets it predicted in 2006 for the following 20 years. Distressingly, you discover that your non-profit must absorb this entire deficit. To cover the $81,000 shortfall, you are forced to reduce services and halt salary hikes for your active workforce.
When adjusted for inflation, that $81,000 gap in 2026 equates to $43,000 in 2006 value. Consequently, in 2006 terms, this retirement package ended up costing your organization $99,000, whereas the employee contributed just $56,000. Even though the original plan was an equal 50/50 split of the retirement funding, the employee ultimately covered a mere 36% of the total expense.
If CalPERS had provided an accurate projection of its 20-year investment yields back in 2006, the required initial contribution from both the employer and employee would have been $134,000—representing just an extra $11,000 from each party. Instead, by overestimating its future rate of return, CalPERS cost your non-profit an extra $43,000 while saving the employee $11,000 (both calculated in 2006 dollars). Viewed differently, CalPERS’s failure to secure a sufficient upfront investment in 2006 directly resulted in an $81,000 penalty to your organization’s operations and staff in 2026.
With this in mind, examine the recent press release issued by CalPERS regarding its latest fiscal performance. Noticeably absent is any discussion about the ramifications of falling below their previous forecasts. Those burdens are shifted entirely onto taxpayers, who—much like the non-profit employer in our scenario—bear 100% of the responsibility when CalPERS misses its anticipated financial returns. In 2006, CalPERS projected an annual return of 7.75%, yet it achieved only 6.81% per year over the subsequent period. Throughout the 20 years detailed in our example, that minor variance compounded into a significant 16% deficit.
However, the real-world impact on taxpayers is drastically worse than this example implies. California’s state and local pension commitments endure for the entire lifespan of the retirees, rather than concluding after 20 years, and CalPERS has historically relied on even higher unachieved rates of return. As a direct consequence, the annual funding demanded from taxpayers to cover these pension deficits has ballooned 20x to 30x, skyrocketing from under $1 billion in 2000 to an astronomical $23.4 billion last year.
For this reason, pension commitments ought to be fully pre-funded from the start using secure assets like US Treasuries—which guarantee future payouts large enough to honor these promises without demanding extra taxpayer funding—or taxpayers must be shielded from absorbing any financial shortfalls.
