California Bill Would Allow State Workers to Opt Out of CalPERS

Proposed legislation would create an optional defined contribution plan.

A California state legislator has proposed a bill that would allow state employees to opt out of the California Public Employees Retirement System (CalPERS) and choose a defined contribution plan in which their contributions would be fully matched by the state, at the same level the state now provides to the defined benefit plan.

The bill would create a new optional defined contribution plan for new state employees who are eligible to become members of CalPERS, and who choose not to make contributions into the defined benefit program.  It would require state employees to participate in an alternate system to contribute the same percent of compensation as similarly situated employees who contribute to the defined pension program, according the text of the bill. 

It would also authorize an employee in the defined contribution program after five years to stay in the program or switch to the defined benefit plan, if the balance in the employee’s defined contribution account equals or exceeds the amount that would have been accrued to the employee under the defined benefit plan. 

The bill was introduced by State Sen. Steve Glazer (D-Orinda), who touted the portability of defined contribution plans, saying the “big difference is that workers who leave state employment would be able to take with them the entire balance in their retirement plan—including both the employee and employer contributions and investment gains.”

Under current law, employees who leave state service before retirement can only receive refunds of their own contributions, plus interest.

“This pension reform idea would be good for employees and provide a more stable fiscal foundation for the state,” said Glazer in a release. “This new retirement plan would be especially attractive to millennials who do not intend to work for the state their entire lives.”

Glazer also said the change could make the state’s pension obligations more predictable because it would no longer be at risk of an unfunded liability for employees who choose the new option. He cited CalPERS’ current unfunded liability of approximately $140 billion, and said the system has only about 68% of the money needed to fulfill all of its obligations.

Glazer modeled his proposal is after a University of California plan that has been offered to new employees since 2016. According to the university, more than one-third of eligible employees hired since 2016 have chosen the new self-directed plan over the traditional pension system.

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