CalPERS should prioritize proven, effective strategies that cost less and consistently deliver better returns for taxpayers and public employees.
The suns peaks over the California Public Employees Retirement System’s building in Sacramento, Calif., Tuesday, Sept. 6, 2022. The California Public Employees’ Retirement System has $180 billion in unfunded liabilities as of its latest report. To try to reduce this debt, the nation’s largest pension system recently approved a plan to increase investment in private markets, doubling down on a strategy that has yet to deliver results and carries significant risks for taxpayers.
Private investments are often pitched as a way to generate returns higher than the public market and diversify portfolios. However, these promises frequently fall short when risks, fees, and market realities are accounted for. As is typical for pension investment portfolios, private equity on paper has been CalPERS’ highest-performing asset class, with a 20-year annualized return of 12.3%.
When CalPERS fails to meet its expected investment returns, California’s state and local governments—meaning taxpayers—are solely responsible for covering the resulting shortfall. Public pension liabilities are legally binding. There is no defaulting on them. Consequently, when public pension system investments underperform, government employers—again, taxpayers—must cover the gap.
But there could be a better way. Since 2000, CalPERS achieved a 23-year average return of 5.6%. Meanwhile, the Public Employees’ Retirement System of Nevada, a $58 billion fund, earned a 6.9% return during that time—while taking on less risk than CalPERS. Nevada PERS achieved such returns with just three employees managing the fund, limiting costs, and increasing long-term returns by investing almost exclusively in publicly traded index funds.
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