Backtested Pension Math: An Empirical Look at the Causes of CalPERS Underfunding

Abstract

This article takes an empirical look backward to identify causes of the current underfunding of public-sector pension plans administered by the California Public Employees Retirement System (CalPERS). It studies six CalPERS plans using actuarial valuation reports from the past eighteen years. It finds, contrary to conventional wisdom, that investment return played only a minor role in the current underfunding. The primary cause was that annual required contributions were too small to provide full funding. In particular, the normal rate of contribution could not have kept up with the actual growth in liabilities, even had investments performed exactly as assumed. The article proposes that actuarial valuations include a comparison of ex ante versus ex post normal rates, meaning the normal rate that was used to determine the annual required contribution (ex ante) versus the normal rate that in hindsight would have been correct (ex post). Such a comparison would allow stakeholders to directly understand the past accuracy of a plan’s actuarial forecast.

Keywords: CalPERS, Sunnyvale, pension, normal cost, unfunded liability, underfunding

JEL Classification: H55, H70, H72, H74, G18, E62