Governor Schwarzenegger on an Agenda to Disenfranchise Public Workers

Audio editorial first aired March, 7 2005 on KQED-FM's NPR Perspectives Series, co-written with Perspectives' Editor Mark Trautwein.

Governor Schwarzenegger’s proposal to revamp the state retirement system offers California a stark choice – radically disembowel CalPERS or support a sound retirement for workers.

Instead of CalPERS‘ current defined benefit plan – in which you and the state make scheduled contributions over the years so you can receive a known payout – the Governor wants state employees to invest in the markets. Its advocates say this will save the state money, but that’s debatable. What we do know is what you get in retirement depends on how good you are at investing.

The current system must be good, because CEOs and Congress have similar plans. And despite the stories you’ve heard about excessive benefits for state workers, the average CalPERS‘ retiree, retires after 20 years with just $20,000 a year.

It’s important to know that CalPERS invests in alternative investments. But unlike the workers the Governor wants to cut loose, CalPERS‘ can invest cheaper and more successfully than any individual. One study showed that between 1984 and 2000, individual investors were returned an average of 5%. For CalPERS it was 9.4%. Individual accounts suffer from excessive fees, in England and Chile fees absorbed 20 to 33% of savings. It cost $1.35 in fees to manage every $100 in private accounts versus 18 cents for plans like CalPERS. Fees will destroy a retirement.

The real winner if the Governor gets his way, is Wall Street which collects more fees and commissions, while not having to worry about the kind of corporate governance watch-dog for which CalPERS is famous.

The loser, will be the workers who lose the benefit of professional management and reduced risk through diversity in large economies-of-scale investments.

My father lost his life savings in the Prudential Securities limited partnership scandal of the ‘80’s, without restitution. In Chile, only 0.01% of investors in the privatized system reached the guaranteed amount in the pay-as-you-go system.

It would be a shame if Californians suffered the same fate.

With a perspective, I’m Andrew Dral.

Thanks,

Andy

Andrew H. Dral