Californias public employees pension fund, CalPERS, is no stranger to scandals. Accusations against the fund have ranged from pursuing political agendas to outright corruption. Earlier this month Sean Harrigan was ousted from his position as chairman of the CalPERS board partially because he led an aggressive corporate reform effort. But the funds problems do not stem from individual board members: any massive government investment agency will eventually succumb to political or financial temptations. The best way to avoid future problems is to privatize the state pension system.
CalPERS is the largest pension fund in the United States, managing $177 billion for more than 1.4 million state employees and retirees. Its thirteen-member board of directors is appointed by state officials (who pick three members), by the governor (six members), and by CalPERS members (also six board members). Although the board has a fiduciary duty to maximize returns for state employees, it often uses the investment power of the fund to pursue political objectives.
CalPERSs push for good corporate governance has gone beyond attempting to make corporate boards work better for their shareholders, singling out companies for political reasons. For example, CalPERS demanded that Safeway change its board of directors and get rid of its CEO. Not coincidently, most CalPERS board members have ties to labor unions and Safeway had recently taken a hard line against striking grocery store workers.
Another example of recent activism by CalPERS is its consideration of a policy of refraining from investing in companies that provide services that compete directly with state jobs. CalPERS also demands environmental accountability and investment in environmentally responsible companies and technologies. Under both of these initiatives, CalPERS is pursuing goals other than the maximization of return for the pension fund.
More troubling than lower returns is the prospect of CalPERS directing private companies to promote its political agenda. The first sentence in State Treasurer Phil Angelidess environmental investment proposal states that CalPERS should use their financial clout in the marketplace to promote their environmental objectives. But governments already have clout with businesses when they pass legislation through the democratic process.
In a capitalist economy the government is not supposed to have additional clout in the corporate boardroom through the ownership of companies. The economic system in which the government owns the means of production is called socialism. When a government fund grows as large as CalPERS and begins to influence corporate decision-making, citizens should be concerned that we are moving too far down the road to serfdom without a public vote ever being taken.
Fortunately, the political influence of CalPERS can be eliminated without harming Californias state employees. CalPERS has political clout because it is a defined benefit plan, managing the pool of all state employee and employer contributions and paying retirees a set benefit for life. Its power in the market stems from the fact that it gets to manage all the money. A move to a defined contribution plan would take away its ability to manage the money.
Under a defined contribution plan, employees would contribute a portion of their pay, the state would match the contribution, and funds would go into an individual retirement account, similar to a 401k. Then individual employees, not the CalPERS board, would decide how assets were managed. Since many employees would choose different mutual funds or index funds, no one agency would have the power of CalPERS.
Privatizing CalPERS need not be as messy as fixing Social Security because CalPERS has assets$177 billion of them. Individual accounts should be established at the present value of what an employee is entitled to under the current system thus ensuring that employees are not made worse off. To establish the accounts, assets should be sold and unfunded liabilities explicitly recognized.
If done correctly, privatizing CalPERS could take the politics out of investment decisions without burdening state employees or taxpayers any more than they already are.
Benjamin Powell is a Senior Fellow at The Independent Institute, Director of the Free Market Institute at Texas Tech University, and former President of the Association of Private Enterprise Education. Dr. Powell received his Ph.D. in economics from George Mason University. He has been assistant professor of economics at San Jose State University, a fellow with the Mercatus Center's Global Prosperity Initiative, and a visiting research fellow with the American Institute for Economic Research. Benjamin is also the editor of Housing America: Building out of Crisis.
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