My first accounting job after college was with a retirement trust operated by a trade association for its members.
Defined benefit plans were common for both the private and public sectors in those days.
Each plan underwent a required periodic actuarial review, as happens today. My functions as a staff accountant included providing data to the actuaries and supporting their work by pre-analyzing each individual plan.
I recall a conversation with one of the actuaries concerning the life expectancy assumptions he applied: a 30-year old white male could be expected to live to around 70, about 77 for a white female and somewhat less for all others. This was back in the early seventies.
I asked if he had considered a higher age since the trend clearly pointed to longer and longer life spans.
He agreed that would be an appropriate consideration, but he had to base his assumptions primarily on actual historical data. However, he reminded me that with each subsequent review, the life expectancy would be pushed upward.
Regardless, the life expectancy assumptions he used would tend to trail probable future experience. The actuary did not believe there would be a significant variance in the funding. Employees and employers would be willing to contribute more to secure the future stream of benefits.
What reminded me of this long-ago conversation was an editorial in the Los Angeles Daily News written by Daniel Borenstein, a columnist with the Contra Costa Times who has a Masters in Public Policy from Cal Berkeley.
Mr. Borenstein criticized Calpers for understating life expectancies for its retirees, effectively hiding the true cost of funding the retirement plan.
“Given constant advancements in medical science…the California Public Employees’ Retirement System hasn’t previously factored future mortality improvements into actuarial calculations. As a result, it has not collected enough money to pay pensions when workers retire.”
“Currently, CalPers studies the mortality data for its members every four years and from that projects how long retirees will live and receive benefits. But those numbers don’t account for the expectation that people will live longer in the future; it only considers how long they’ve lived in the past.”
That was deja vu for me. I truly hope our elected officials at the state and local levels read the article. Along with public union leaders, they are living in denial regarding the stability of public pension plans everywhere in California.
But how serious is this understatement? Remember, the actuary I dealt with did not think the variance was significant.
Well, times have changed since the seventies.
Consider this: deaths per 100,000 have dropped by 32% and 45% for middle-aged persons since then (female and male, respectively). All that in a span of 40 years. Using a simple average, that is one point per year. A compound rate would be a little higher. This trend is much higher than the historical data we relied on in the seventies. That means the rate of underfunding has been running higher than my former employer’s actuary ever imagined.
While a percentage point per year may sound harmless, the cumulative effect between actuarial adjustments could easily amount to 4% or 5% underfunding. That’s very serious since we are dealing with billions in accrued benefits.
Who will fund the shortfall?
The responsibility should fall mostly on the participants, but most of our politicians, including the Los Angeles City Council and our State Senators and Assembly Members, do not have the stomach to bargain in earnest with the public unions on whom they depend for campaign contributions.