The board of the California Public Employees' Retirement System (CalPERS) approved the hike to help cover the cost of benefits for retirees who are living longer.
The increase will start this summer, and cities and other government agencies will follow suit in two years.
"The board today took important and responsible action to strengthen California's pension system," Gov. Jerry Brown said in a written statement.
Projections show workers are expected to live an average of as much as two years longer, driving up the cost of paying benefits to people until they die. Women retiring at age 55 in 2028 are expected to live to 87.
Contributing more to CalPERS' pension funds means local governments will have less money for services such as police, roads and parks. But delaying payments to the pension system would cost more in the long run.
The Associated Press contributed to this report.
