In his December 1 appearance before the California Legislature to push his pension reform plan, Governor Jerry Brown responded brusquely to suggestions that his plans might raise pension costs in the short term. “Well, that tells you you’ve got a Ponzi scheme,“ Brown said.
In fact, it proves exactly the opposite.
In a Ponzi scheme, an operator solicits cash from his mark on the promise that he will place the money is some spectacular investment and deliver equally spectacular returns. Instead of investing it, however, he spends the money. He covers the theft by bringing in more suckers, some of whose dollars are used to pay dividends to the initial investors. The scheme collapses when he can no longer bring in enough new suckers to keep up with the promised payments. He runs off and leaves the investors penniless.
As a matter of law, the pensions run by California Public Employees’ Retirement System cannot fit the description of a Ponzi scheme. Public employers are required each year to pay into the system the actuarially required contribution needed to cover the pension promises they have made to their workers. The money put aside for employee pensions is invested, not spent.
Indeed, it is precisely because CalPERS doesn’t operate as a Ponzi scheme that California is now having a pension policy debate. The combination of the big pension promises made in 1999 and the big investment losses in the 2008-09 financial crisis has pushed up required pension contributions for state and local governments. The higher contributions put pressure on budgets, forcing unpopular service cuts and tax increases.
A lot of politicians would like to relieve the pressure by going Ponzi—either by breaking the promises or finding a way of not having to make the required contributions. But the law doesn’t let them. They will have to settle for a useful but still painful alternative: revising the pension system going forward so California no longer will make promises it doesn’t want, or can’t afford, to keep.