Jan. 31 (Bloomberg) -- The California Public Employees’ Retirement System was flooded last month with applications by government workers seeking to buy additional years of service that can be counted toward their pension when they retire.
The practice, known as buying “air time,” was barred Jan. 1 under legislation sought by Democratic Governor Jerry Brown to curb costs. The largest U.S. public pension said it received 12,000 applications in December, up from an average of 1,100 a month in fiscal 2012, and 400 a month the prior year.
California public employees were allowed to add as much as five years of credit for time they didn’t actually work to the formula used to calculate their pensions. The $254 billion fund said there’s no cost to taxpayers as long as the system meets its target investment return of 7.5 percent over the long term.
“Ultimately, we don’t truly know until everybody who has purchased dies,” said Amy Norris, a Calpers spokeswoman, referring to the size of the payouts. “Our actuaries say that it is safe to say it is cost-neutral at this point.”
The pension has earned more than 9 percent over 30 years and 7.7 percent over 20. It suffered its biggest one-year decline in 2009, putting its five-year return at just 0.1 percent as of Sept. 30.
Norris said there was no additional cost because some who purchased the service credit die earlier than expected, while some live longer, canceling each other out.
Since the practice began in 2003 under former Democratic Governor Gray Davis, at least 50,000 public employees purchased air time, according to Calpers. The fund covers 1.6 million workers and retirees.
Public pensions are calculated by multiplying the number of years an employee worked times a percentage of his or her final pay. By purchasing more years, they increase their monthly pension amount. The practice is similar to buying an annuity, in that the worker puts money away toward retirement.
When an application for air time is filed, Calpers calculates the cost and reports that to the employee, who then has the option of making the purchase.
The cost of the service credit depends on the employee’s pay rate, age, life expectancy, the discount rate and related factors, according to Calpers. The fund allows lump-sum payments or installment plans, which charge interest.
Calpers and other public pensions been criticized for assuming unrealistically high rates of return on invested assets. The rate can mask how much is really needed to cover benefits promised to government workers.
Brown and lawmakers last year enacted a package of bills that caps pension benefits for public workers and requires new employees to pay for half of their pension costs. It also banned the purchase of airtime and other types of inflating pensions, known as spiking.
Savings will be sought from current employees through bargaining with their unions to lower projected obligations as much as $55 billion over 30 years, the governor’s office has said.
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