Facts About California's CalPERS Pension

Retirement Plan With Advantages Over an IRA and 401(k) Accounts

Oct 22, 2009

A CalPERS pension has advantages over more common retirement plans such as a traditional IRA,Roth IRA, or 401(k).

CalPERS (California Pension Employee Retirement System ) is the retirement pension for state employees as well as many county and city employees within California. Some large groups of public employees have memberships in other large systems similar to PERS. California public school teachers are in a separate pension called the California State Teachers Retirement System (CalSTRS). Those employed by the University of California belong to the UCRP (University of California Retirement Plan).

Defined Benefit vs. Defined Contribution

In a defined contribution plan such as a 401(k), most of the contributions to the retirement fund are paid by the employee. Although the employer may match contributions from the employee, the bulk of contributions are paid for by the employee. Since the recession, a large number of private sector employers have suspended their 401(k) match programs. Even if the match still exists, they are subject to vesting requirements.

Most 401(k) plans allow access to half of the account balance prior to retirement via loans. The rest of the account can be accessed after separation of employment.

With a defined benefit pension such as CalPERS, members pay a fixed portion of their pay into the pension, usually 5% to 9% per paycheck, while the government employer pitches in the remaining cost of the pension. In a few cases, unions have negotiated contracts that obligate the employer to pay for the employee's contribution.

The employee portion of a CalPERS pension cannot be borrowed against or accessed until after permanent separation from employment. The employer portion is never refundable, even after retirement.

CalPERS Monthly Retirement Benefits

Benefit Factor x Years of Service x Highest Annual Base Salary = $ Annual Pension Payment

The benefit factor is determined by the employer's contract with PERS and the age when the member first draws upon retirement benefits. For example, if the plan is 2% at 55, that means the member cannot get the full 2% benefit factor until he reaches age 55. Otherwise, the benefit factor is reduced. All plans require a minimum retirement age of 50.

Keep in mind that many types of compensation do not count towards a CalPERS retirement such as overtime, vacation cash-out, and bonuses. However, pension spiking is still possible if an employee goes to a position with a very high annual base salary in the final year of public employment. For example, if someone received minimum wage for 39 years of service, but is paid $200k as a city manager in the final year of service, the pension is calculated from the $200k.

Monthly retirement payments are guaranteed for life, even if the member lives to be 120.

Depending on the employer's contract, the pension may also include some or all of the following optional features:

Drawbacks of IRA and 401(k) Accounts vs. CalPERS

Those who are using the more widely available IRA and 401(k) accounts do not have many of the features listed above. In particular, there is no COLA or guaranteed payment for life unless it's bought as a very costly annuity from a life insurance company. It's very possible to outlive an IRA or 401(k) account.

Although it seems like public sector employees are making out like bandits, that is far from the truth for the vast majority of retirees. In 2005, the average CalPERS monthly benefit was $1,673.82. Although that's a good amount, it won't pay for a life of luxury. The reason for the low monthly benefit is because public employee unions negotiate a generous pension in exchange for salaries that are far below those in the private sector, which is used to determine the monthly PERS benefit.

"Pension Debate: The Myths and Realities of Defined Benefit and Defined Contribution Plans." California Pension Employee Retirement System (January 2005).

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