The California Public Employees’ Retirement System (CALPERS) is the pension fund for the state’s municipal workers. It is one of the largest pension funds in the world, with over $250 billion under management, and it has great influence across other pensions in the country. CALPERS, like many other state pensions and just like Social Security, doesn’t have sufficient funds to pay promised benefits to retirees over the next 30 years. The shortfall is a staggering $87 billion. This represents about 74 cents in funding for every dollar in promised benefits. Faced with this situation, CALPERS Pensions and Health Benefits committee approved a proposal to increase by 50 percent the fees it charges to municipalities that have employees enrolled in CALPERS. How will the municipalities pay for this increase? New taxes.
Even if you don’t live in California, this move by CALPERS will affect you. As Bloomberg’s Michael Marois reports, most state pensions are in a similar situation. It's only a matter of time before they follow CALPERS's lead, and it's likely that at some point Social Security will have no choice but to raise payroll tax contributions to fund its own massive shortfall.
This situation also has many implications for small-business owners. First, state and municipal taxes will increase, hurting your bottom line. Second, many states will divert money from general budgets into funding pension liabilities, hurting infrastructure investment and the quality of government services. Third, many state and municipal governments may choose to borrow more money to help fund these gaps, which will lead to an overall increase in interest rates given the scale of the problem. Fourth, many retirees may be hit with cuts to their benefits if the increased taxes don’t come in time, which means they will have to work for a longer period of time.Finance Watch articles.