CalPERS: What It is, History, Investments

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The California Public Employees’ Retirement System (CalPERS) is the pension system for California state employees, many school employees, some judges and legislators, and workers at local public agencies that contract with it. It is a U.S. public plan, not a personal account. Most members earn a defined benefit pension: a monthly retirement payment set by formula, not by the balance of an individual investment account. CalPERS is the largest public pension fund in the United States, and it also runs health and other benefit programs for its members.

How CalPERS works

CalPERS pools money from employees and their employers and invests it in a single large fund. Members contribute a share of each paycheck, employers contribute on their behalf, and the fund’s investment returns make up the rest. When a member retires, CalPERS pays a pension from that pool.

Close to 3,000 employers participate, including more than 1,300 school districts and about 1,500 public agencies. Participation is not automatic for every California government. Some cities and counties run their own retirement systems, and participating employers have sometimes left CalPERS. Whether a job is covered by CalPERS therefore depends on the specific employer.

Police officers and firefighters at participating agencies are members, alongside office staff, maintenance workers and other public employees. Members manage their accounts online through the myCalPERS member portal.

How the pension is calculated

Because CalPERS is a defined benefit plan, the retirement payment comes from a formula rather than from how much money a member’s contributions grew to. Defined benefit formulas of this type generally multiply three inputs:

Annual pension = benefit factor × years of service credit × final compensation

The benefit factor is a percentage tied to the member’s age at retirement and the formula their employer has adopted. Final compensation is a measure of the member’s highest or final salary as the plan defines it.

Hypothetical example: Assume a member retires with 25 years of service credit, a final compensation of $80,000 a year and a benefit factor of 2% at their retirement age.

• 2% × 25 years = 50% of final compensation
• 50% × $80,000 = $40,000 a year, or about $3,333 a month before taxes

These numbers are illustrative only. Actual benefit factors, retirement ages and compensation rules differ among employers and member categories, so two employees with the same salary and service can receive different pensions.

Other benefits

Retirement pay is only one part of what CalPERS administers. Members may also have access to:

• Health insurance, often with the option to cover family members
• Long-term care insurance
• Death benefits for survivors
• Disability and industrial disability retirement for certain jobs, covering members who cannot continue working because of illness or a job-related injury
• A mortgage program for members

History of CalPERS

CalPERS started in 1932 as the State Employees’ Retirement System, covering state workers. In 1939 it expanded to let counties, cities and school districts join. About two decades later it added health insurance, which became one of its major programs. In 1992 it adopted the name California Public Employees’ Retirement System to distinguish itself from other state programs.

CalPERS investments

To pay benefits decades into the future, CalPERS invests across domestic and international markets. As of 2019, it managed $372.6 billion in assets, which made it the largest public pension fund in the country. Because the fund holds stakes in a large number of public companies, broad market performance, such as moves in the S&P 500, feeds directly into its results.

That scale also makes CalPERS an influential shareholder in corporate governance. For years it published an annual “Focus List” of companies it considered weak financial performers with poor governance practices. It dropped the list in 2010 and chose to engage with companies directly instead. It has also taken legal action as an investor, including participating in a 2009 class-action lawsuit against UnitedHealth Group.

Investment returns matter because of how a defined benefit plan is funded. The pension a retiree receives is fixed by formula, so if returns fall short of what the plan expected, the gap generally has to be covered by higher contributions, typically from employers. Strong returns over long periods ease that pressure, which is the same compounding effect that drives any long-term portfolio.

CalPERS vs. similar plans

• CalPERS vs. a 401(k) or IRA: A 401(k) or IRA is an individual account whose value depends on contributions and investment results, with the saver bearing the investment risk. CalPERS pays a formula-based pension, so the member’s benefit does not rise or fall with the fund’s yearly returns. CalPERS is not an IRA.
• CalPERS vs. CalSTRS: CalSTRS (the California State Teachers’ Retirement System) is a separate system serving California public school teachers. The two are often confused because both cover school employees.
• CalPERS vs. federal plans: Federal employees are covered by federal programs such as the Thrift Savings Plan, not CalPERS. CalPERS covers only California public employers.

Limitations of CalPERS

• Coverage depends on the employer. Not every California city or county participates, and employers can leave the system.
• Benefits vary. Because formulas differ by employer and member category, general descriptions of CalPERS benefits may not match an individual’s actual terms. A member’s own CalPERS records are the source for their benefit.
• Funding risk falls on employers. Weak investment results do not cut the formula benefit directly, but they can raise employer contribution costs, which affects public budgets.
• Less portable than individual accounts. A pension built on years of service with a participating employer does not move between jobs the way a 401(k) balance can.

The Bottom Line

CalPERS matters most to California public employees whose employer contracts with the system, since coverage and benefit formulas depend on that employer. A member's pension comes from service credit, age and final pay rather than an account balance, so personal CalPERS records are the reliable source for benefit details. Weak investment returns tend to raise employer costs instead of cutting promised pensions.