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CalPERS' Long-Term Investment Strategy Helps Weather The Market

CalPERS' Long-Term Investment Strategy Helps Weather The Market 

CalPERS' long-term investment strategy helps weather the market

December 22, 2008


It seems that every time the stock market suffers a major setback, those who don't fully understand how government pensions work begin sounding alarm bells that it will absolutely drive up the cost of government pensions. A close examination of history and the facts suggests it's way too early to make such assumptions.

First, the California Public Employees' Retirement System employs a long-term investment strategy designed to weather periodic financial storms. This strategy, along with professional investment management, has produced an average annual investment return of nearly 10 percent over the past 20 years – which included two market downturns – well above our target of a 7.75 percent average annual return to fund benefits.

We amortize investment gains and losses over 15 years, greatly reducing cost volatility for state and local governments. One year of poor investment performance will not cause a sharp increase in employer costs because we can use investment gains from previous years. We cannot predict the future, but we do know that come July 2009, employers will not have to pay more due to investment performance.

Historically, market downturns are followed by recoveries. CalPERS began in the Depression of the 1930s. We survived the 1987 stock market crash and the recession of 1990. During the 2000-02 recession, our pension fund lost $50 billion on paper, but we rebounded with a gain of $120 billion over the next four years.

It may take time for markets to recover, but CalPERS has more than enough cash to pay benefits without selling a single asset.

A longer version of this appeared Nov. 9 in the Sacramento Bee.