No easy way to cut CalSTRS benefits

Current teachers and retirees well protected
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Call it pension envy, matched by frustration over higher pension contributions that taxpayers will eventually be asked to fork over. The clamor for cutting public employees’ pension benefits has grown louder. And that includes calls to change CalSTRS, the pension system serving 852,000 teachers and administrators in California.

The Legislature approved bonus benefits in the fat years of Wall Street when it looked like pension systems would forever be fully funded. (See excellent post by Ed Mendel of Calpensions.com.) Then the recession hit, and, amid mortgage and bank fraud on Wall Street, stocks tumbled. The downturn on Wall Street in 2008 has left CalSTRS and CalPERS, which serves state employees and some school district employees, needing higher taxpayer and employee contributions to make up for problem investments. (See earlier post.)

But those who see cutting pensions as a way out of the current state budget deficit and school districts’ cuts should think again. Analysts say the state cannot legally renege on payments to retirees or promises to current employees. Courts have been protective of guarantees made to public employees, and the Legislature, which sets the pension benefits and contribution rates for CalSTRS, will have to provide some other comparable benefit, like higher pay, if tries to cut CalSTRS’ obligations to workers.

“This means that pension contracts for existing and past employees are uncommonly difficult – or expensive – to change,” said Jason Sisney, director of State Finance Policy for the non-partisan Legislative Analyst’s Office.

That’s not to say legislators or groups pushing reform by initiative may not try. Some argue that local governments and the state have the right to change future benefits for current employees after crediting them for what they’ve already earned. Courts will likely be skeptical, Sisney said.

What the Legislature could do is change the system for new employees: switch from a defined benefit to a matched contribution 401(k) plan, raise the retirement age, or alter the formula, based on a person’s age and years of teaching, used to determine the retirement benefit. But that wouldn’t help the state’s immediate budget crisis, and, if done punitively, could be one more factor to discourage potential teachers from entering the profession.

CalSTRS versus Social Security

CalSTRS  is a much better deal than Social Security, where the full retirement age is later (66 or 67 for baby boomers, depending the year of birth) and the payout is less, calculated on a lifetime of yearly earnings, not the final – and usually the highest paying – year of work.

A teacher, principal, or superintendent who retires at the age of 60 after, say, 35 years of teaching and managing, will receive 70 percent of her final year’s salary. If she waits three more years, retiring after 38 years at age 63, she’ll get 91 percent of her last year’s salary. And if she works about 42 years and retires after 63, she can expect to receive her full final year’s pay every year for the rest of her life.

The average Social Security benefit – about $1,000 a month, or a little more than $12,000 a year – replaces about a third of workers’ average earnings. The median yearly benefit of newly retired CalSTRS members was $49,000 per year last year, or about $4,100 per month. At the high end were top district administrators with retirement incomes well exceeding $150,000.

But many workers in private industry get to combine Social Security with company-paid pensions or employer-matched 401(k) plans; CalSTRS members don’t have those. And teachers and administrators also pay substantially more into CalSTRS than workers in the private sector pay into Social Security: 8 percent of paychecks is deducted for CalSTRS members, versus 6.2 percent deducted for Social Security (actually only 4.2 percent this year, because of the one-year tax cut Congress passed in December). In addition, teachers who have worked other jobs in their careers also qualifying them for Social Security will not receive full benefits of both. They are penalized, with some portion of their Social Security benefits wiped out.

There may be ways that the Legislature can tinker around the edges without running afoul of the courts. Last year, legislators passed SB 1425, which would address “spiking,” the practice of boosting the last year of pay by throwing in non-salary items, like the value of a car allowance and unused vacation for upper-level managers. It would base the retirement benefit for all public employees on the average salary of the final three years of work, instead of the final year. That’s what done now for CalSTRS employees who retire with fewer than 25 years of service.

Gov. Schwarzenegger vetoed the bill because it was attached to another retirement reform he felt didn’t go far enough. Sen. Joe Simitian, a Palo Alto Democrat who sponsored SB 1425, has resubmitted it this year as SB 27. It’s likely to pass again.

(For a look at what other states are considering, check a blog in today’s EdWeek.

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Calculating CalSTRS benefits:

  • Under the defined benefit program, teachers contribute 8 percent of their salary; districts contribute 8 percent, and the state 2.01 percent.
  • Teachers are vested in the system after working five years;
  • Employees can retire as early as 50, at a lower rate: 1.1 percent of pay times number of years worked (25 years would yield 27.5 percent of pay;
  • At age 60, the rate becomes 2 percent of pay times years (25 years would yield 50 percent of pay); at 60 years, 9 months, 2.1 percent of pay; at 61 years, 6 months, 2.2 percent; at 62 years, 3 months, 2.3 percent. The maximum rate, 2.4 percent, kicks in at 63 years (25 years would yield 60 percent of pay).

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29 Comments

  1. Any idea what the poor economy has done to retirement rates?  Any chance a sustained jobless recovery will mean teachers keep working?  60% of pay is decent, but it would seem to leave plenty of room for teachers to seek other employment after retirement and if those jobs just don’t exist.  If teachers retire can they go back to work as teachers and retain the retirement benefits?  I’m curious if there are any other significant factors that might change the character of what the problem seems to be.

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  2. John,
    You write: “The median yearly benefit of newly retired CalSTRS members was $49,000 per year last year, or about $4,100 per month. At the high end were top district administrators with retirement incomes well exceeding $150,000.”
    There is a huge difference between a retiring teacher receiving $4,100 a month and a retiring administrator receiving over $10,000 a month.  The problem is not the teachers’ union or the classified staff unions.  The problem is giant paychecks for life to administrators.  We have to get a handle on the purpose of retirement checks.  Social Security was designed to provide a safety net – not a cushy lifestyle.  As a locally-elected official, I am told regularly by administrators that they barely can afford costs of living on their annual earnings of $100,000 to $130,000 a year.  I’ve even heard this (repeatedly) from a high level executive who pulled in more than $200,000 a year.  This is unrealistic, unempathetic horsepucky.  There are very few public sector administrators who could transfer their skills and experience into larger pay in the private sector.  These administrators are not making some big hairy sacrifice to take home a six digit compensation for their public sector service.
    I suggest the CalSTRS and CalPERS plans should be capped.  Employees would contribute and be matched for their first $50,000 of annual pay.  Then employees could invest/spend their paychecks as personally chosen – as they already can!  This limit would enable workers to count on a safety net when they retire that will cover basic housing, food and modest transportation – separate from their own investments and savings.  And, we’d get a handle on pension costs.  If we’re stuck drawing a line in the sand for those of us mid-40s, then so be it.  The boomer administrators can run off to the country club retirement home with their bags of booty.  And, the younger generations will demonstrate responsibility, even if the 50 plus crowd believes they actually deserve hefty paychecks forever.
    You suggest “But many workers in private industry get to combine Social Security with company-paid pensions or employer-matched 401(k) plans.”
    Respectfully John, the payouts from a 401(k) plan is minimal compared to CalSTRS payouts for administrators.  And hardly any California companies today provide workers with “company-paid pensions.”  This argument is a myth.  Are there a few companies providing “company-paid pensions”?  Sure.  A few.  But even those such pensions are paying out tiny bits of dust compared to what retired administrators count on for direct deposit every month.
    We’ve got to solve this problem.  The first step is a pension cap, so we can protect the basic pensions on which modestly-compensated lifetime teachers and classified workers should count.  Lumping retired janitors, school secretaries and teachers in the same category as administrators and executives is wrong.  If the more highly compensated employees are so smart as to command higher paychecks during their working careers, they should be smart enough to manage their personal money and live an appropriate fiscal lifestyle during their working careers – not compete for image with the over $200,000 a year crowd.

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  3. It’s hard enough to hire well-qualified teachers at the salaries paid these days.  Let’s disrespect them even more by cutting their pension benefits so that they live out their last days in poverty.

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  4. Chris: There is a cap on income for determining pensions, although it’s very high.  This from a Q and A from School Services of California. Implication is that it’s a federal issue. High pensions for superintendents and principals represent a small portion of pensions but no question are a source of great taxpayer anger.

    “There is an upper limit on the salary base that can be used for determining pension benefits—for both the State Teachers’ Retirement System (STRS) and PERS—but it was implemented effective July 1, 1996. Anyone who started their service with STRS or PERS before that point is grandfathered in.

    The limitation is set by Internal Revenue Code (IRC) Section 401(a), and changes each year due to a cost-of-living adjustment. For the 2010 federal tax (calendar) year, the limitation is $245,000.”

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  5. Thanks, Dr. Shapiro.  I had no idea it was retirement plan was the only thing that kept people in the teaching profession.  So much for dedication to molding young minds.
    Teachers are a dime a dozen these days.  I know lots of math, English, and social science teachers who are getting by somehow on subbing.  Their problem is that like me they had prior work experience so they aren’t impressionable sweet young things just out of school who believe whatever the admin and union chiefs tell them.
    I kept my mouth shut in the teachers lounge for a long time.  The education community has an attitude of entitlement and injury which is sickening when I look at all the ordinary taxpayers who wanly joke about their 401K turning into a 201K with no government sugar-daddy to make up their loss.  At one school where I taught I was more highly paid then 90% of the parents and their only retirement plan was to work till they die.
    If teachers can’t see it clear to live like the ones who pay the bills, then they should try to find a better job outside education.  Unemployment in CA is officially around 12%, add in those not counted because they gave up, those underemployed (engineers working at McDonald’s) and you are looking at depression era unemployment levels.  Kids coming out of college with degrees in Chemical Engineering or Computer science living at home and working at Costco.
    Good luck to all the teachers, especially all the those teaching English, foreign languages, phys. ed., arts, and music.  I am sure the private sector has many openings for their skill sets.
    Don’t get me started on guidance counselors pulling down $120K+ and administrators pulling in well over $200K.

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  6. California Public Pension Reform: A Solution in Search of a Problem.

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  7. If you think it’s so bad that “administrators pulling in well over $200k” is so awful, then please list (1) and only (1) private sector position responsible for the oversight of multiple divisions, compliance with multiple levels of government, including an elected board, oversight of perhaps 1,000 employees, management of a multi-million dollar annual budget, and service to perhaps 10,000 “customers.”
    I can think of one, and it’s called “CEO” and very few of that description make the $200k you are whining about.
    And about the 401k thing: I guess your solution is that since not everyone can have a pension, no one should? Why not argue the other way: 401ks are a way for Wall Street to profit off of retirement. Better to give everyone bigger social security?
    Sounds like you’re more interested in sticking it to your former colleagues—I’m sure you just were too excellent to stay in that profession—than you are in working, practical public policy solutions.

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  8. Here’s an article that clearly defines what is meant by pension obligations.  It may be useful to help in understanding what constitutes a pension promise that is protected by law and what is not.
    Also check out the related column written by Girard Miller over at governing.com.

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  9. P.S. @FormerTeacher
    Why are teachers the only people not allowed to get paid for a living?
    Free market champions sure seem to think supply and demand will solve everything, so please explain in complete detail how offering such a low price will create such high demand of smart, well-educated teachers?
    Dedication? Can one not be dedicated to being a doctor, lawyer, banker, etc.?

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  10. I’m not a teacher but I find it naive to think that teachers are just in it to save the world & unrealistic that they are not allowed to care about their financial survival. They likely care deeply about kids and education but still have to eat and pay bills, so AMAZINGLY they still care about pay and benefits. Change the system for new-hires if needed but dont have the moral bankruptcy (and likely legal inability) to attack current employees or old retirees. Besides as the stock market recovers all the losses will be recouped and the funds will be at 100% sustainablility – this was just a short term dip. Why scrap a system that within a few years will be back to normal or better? I’ll tell you why – JEALOUSY.

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  11. Why don’t Districts and the CSBA start acting on what they can control today and  end spiking right now ?  There is no need to wait for Sacramento.

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  12. First of all, teachers aren’t in Social Security at their unions behest due to the politicians that pander to them. Teachers who worked in jobs where Social Security taxes were collected aren’t “penalized” for that; they just are no longer rewarded as if they were low-lifetime earners because their income from teachers wasn’t recognized. You need to recognize how Social Security works. It redistributes income from high earners to low earners. What the replacement of wages on average that Social Security benefits represent isn’t what’s important. That varies with income. Basically Social Security benefits are calculated by taking an average indexed (for changes in average earnings of the workforce) earnings during the 35 years in which you earned the most. Then it takes that average and applies return rates of 90%, 32% and 15% to different parts of that averaged indexed income. This year they are respectively, $9,132 and below, $9,132 to $55,032, and over that to the maximum taxable income, which this year is $106,800.

    You can see from above that if a teacher worked for a few years at other jobs and that income was then averaged over 35 years, excluding what they earned as a teacher, that average would likely fall in the 90% return on that income bracket, a provision that is a social welfare component of Social Security. What you termed “penalized” is the stopping of welfare for the well-off. Of course that doesn’t stop teachers from endlessly complaining about it. This month’s “Contact”, the California Retired Teachers Association magazine, happens to have it as their cover story. But it’s in every issue.

    The valid comparison is what teacher would receive and when they could receive it if they were in the Social Security system, as they should be. In the100% example that you gave for someone retiring at 63 year old retiring, likely at the top of the step and column salary schedule, that would be something like $6-7,000 grand a month. Contrast that to the highest benefit under Social Security available today at 66: $2,366. And that person would have earned considerably more in their lifetime, and paid taxes on it, than the teacher would have.

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    • Social Security hardly redistributes from the rich to the poor. More like from the lower middle class to the poor. The rich, if they even work at something subject to SS or SE tax, quickly blow past the maximum annual tax. People making more than around $100K (probably a bit over that now) don’t pay tax on amounts over that. In private business, that’s mainly the senior managers/CEOs and owners, not those who work there. In schools and most government organizations, that’s the top managers and political types, not the line workers.

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    • Thanks for your detailed explanation. The two systems, Social Security and CalSTRYS, are constructed differently; Social Security does serve a different purpose. What you aren’t acknowledging is that the offset of Social Security benefits for CalSTRS members is punitive for mid-career workers who want to become teachers. They won’t teach long enough to earn full pensions under CalSTRS and will not get credit for the years of contributions to Social Security. That is not fair and is a disincentive for people who could make a vital contribution to the classroom. I’m no expert; there should be a fix for this.

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  13. John,
    A little over ten years ago benefits were increased dramatically with no additional contributions to STRS required.  The benefits for retireees prior to 2000 were considerably less.   A retiree with identical number of years under STRS who retired in 1993 with more than 30 years of service with the same final salary as one who retired with the same number of years of service in 2003 receives only 2/3 as much money.  That is, the 2003 retiree gets 50% more because of major changes in benefits with no additional contributions to the fund.  The former rules were based not on the salary of the final three years but on the average of the three highest consecutive  years of base pay.   Current retirees receive an additional $400 a month if they have 30 or more years of service.  The new benefits increased the multiplier to 2.4% per year times the number of years of service instead of the 2.0% that had been in force since 1972.
    In 1972, those who were not in the retirement age range were all automatically reduced to 2.0%.  Some had been at 2.5% with fifteen or more years of teaching experience.  They simply lost that 15 years of 1/2%.  There is a precedent for reducing benefits.
    So, one helpful act to move toward fiscal responsibililty is to change the current rules back to what they were–(1) no $400 a month extra, (2) reduction from 2.4% to 2.0%, and (3) the retirement amount to be based on the three highest consecutive years of base salary not including overload pay.  Put this into effect June 30, 2012, thus giving those eligible for the golden treatment to retire if they wish.  Had STRS retained the earlier rules,  it would not be so out of balance.  This also would reduce layoffs and keep in the classroom younger faculty with less seniority.  Get real, STRS!

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  14. Excellent articles, Stacey. They make the important  distinction between the obligation to honor the pension commitments to retirees and to current employees for the past work and the latitude to change pension terms for current employees for future work and for new employees. I recommend that others check out the pieces. Thanks for bringing them to our attention.

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  15. School districts actually pay 8.25% of all salary compensation paid to certificated staff, not 8% as stated. It used to be that there was no “overtime” or extra pay for STRS members for which they got credit and for which employees and districts  paid contributions. STRS changed that when they creates the DBS program. Now employees and district pay a total of 16.25% on all salary earned. 

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  16. Retired prison dentists are making $600,000. Talk to me when you fix THAT.

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  17. We can talk about different formulas for accruing benefits, but the heart of the problem is having a defined-benefit plan.  Period.  They are not viable, and that’s why they have almost disappeared from the private sector.  The temptation — in the private sector, and still in the public sector — is to overcome an immediate problem (current pay and benefits that seem unsatisfactory to employees) by making promises of future benefits 10, 20, 30 years into the future that the manager making the decision will never have to deliver.  Who wouldn’t take that deal?  There is an inherent disconnect in accountability that cannot be satisfied.  Private companies would have gone on making these illusory promises if new accounting rules had not forced companies to disclose the real future costs to the investors who owned the company.  The accountants, and then the workers, realized that they could pretend any longer.

    Workers in our new, more mobile, economy are also discovering the inherent inflexibility of a pension plan, where contributions come out of one’s pay from Day 1 (regardless of whether the worker or the employer is putting it in, it is coming out of the total compensation bucket), and yet one doesn’t get vested for 5, 10 or more years down the road.  Who stays with one employer that long?  I have asked new teachers at private schools where there is no pension (and the salaries are also lower than in adjacent districts) if they minded having a 401k-type plan, instead of a pension, and they almost all had the same response:  they weren’t sure if they would want to stay with one district long enough to become vested, and given the financial condition of many districts, they seemed skeptical that the “defined benefit” plan would really be there anyway, in 20-30 years.  The younger teachers get it.

    These pension plans are doomed.  We just need to transition sooner, rather than later, to realistic, viable retirement arrangements that employees can control on their own.  It will avoid even more pain in the future.

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  18. I am concerned about this mid-career disincentives. Members of my own family face just this situation. I assume that Social Security takes some of this into consideration in their calculations, but I don’t really know. The easiest fix I can see is the option of simply paying into Social Security. Of course the teacher would have to pay both the employee and employer taxes like someone who is self-employed. That way they would be no different than any other person in the system. They could and would need to do that going backwards on all income  they have earned outside the system while also paying the interest that the SS trust fund would have accrued on those contributions had they been made at the time. Of course that still would give them something most people don’t have: a choice, which allows they to compare what would be best for themselves. The right thing to do is to bring everyone into the system and honest reform proposals for Social Security would do just that.

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  19. 1. I heard the State kicks in 4.5%, not 2.01%. Which is it?
    2. Above, it says that you have to be 63 into for the age factor to kick in at 2.4. Actually, in most cases, it’s 61.5 and not 63 due to other factors.
    3. 403(b) programs are supposed to supplement teacher retirement but the district can limit the vendors to a pack of crooks. Berryessa Union School District won’t even give information to 403Compare.org nor will they allow the 403(b) offered by CalSTRS.
    4. If I retire now and live to 75, the life expectancy of an American male, I’ll cost CalSTRS over a million dollars. It I work until I’m 68, I’ll cost CalSTRA only 600,000. So why won’t CalSTRS induce me to work longer by modest 5% raises every year? Pay me $40,000 in raises and I could save them $400,000.
    5.My district would have to pay me $200,000 more than they’d pay for a young, inexperienced teacher, but CalSRS, with all the money they’d be saving, would be able to cover that cost too, if those two governmental bodies ever decide to work together.
    6. If I work longer, CalSTRS saves a lot of money, but since my longevity raises stopped at 33 years of service, nobody is giving me a monetary incentive to save them big bucks. It would take just a little to save a lot.
     
     
     
     
     

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  20. “And if she works about 42 years and retires after 63, she can expect to receive her full final year’s pay every year for the rest of her life.”
    Which, with all the current stress on teachers will be 2 or three years after she retires.

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  21. I’m sure they will be changing all this for CALSTRS.  Employee 50%, District 25%, and State 25% will probably be the future.

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  22. Hi Jim, thats a pretty interesting take, but I think a fairly one-sided one. Pensions didnt go away because they are unsustainable, they went away because the law was changed to allow an alternative that was cheaper for employers and makes the private sector a boatload of money.
    If you are truly worried about sustainability then you should be scared to death of 401ks. Not only do they get only a fraction of the contributions, they also earn much lower rates of return, disproportionately so for those who make the least. How can that possibly be more sustainable?  Of course they will pay out less (much less, if anything at all), but that ‘solution’ only creates a much larger problem.
    Having all of our retirees living in poverty is going to be a disaster, from the standpoint of tax base, consumer base and entitlement commitment.
    I would wager that anyone who tells you they’d rather have a 401k than a defined pension plan either makes enough money for the difference not to matter or they dont understand what a 401k is.

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  23. There seems to be some confusion about the truly dire consequences of the S.S. Windfall Exemption Provision enacted by the Reagan Administration in 1983. I am now a California teacher with 10 years into the system, coming to the career later after a journalism career. I’ve worked since I was 14 and paid into Social Security for 23 years but I will be severely penalized by the WEP for having two careers and working part time to raise a family. Bottom line- if I were to retire at age 60 I’d get $ a CalStrs pension of $1,100 a month and my Social Security – even if I waited until age 70 would be cut to less than $300 a month. What’s worse, they will also take away the full SS spousal benefit should my husband die (thanks Gov. Pension Offset). So after working all my life I will be without a subsistence income.
    I know teachers who served the public for 20 years, like me with two careers, who require food stamps to cover groceries.
    The WEP set no bottom limit for pension basic income. It needs to be changed.  I would NEVER have become a California teacher had I known this. Unfortunately they didn’t make it illegal not to inform new hires of this until after I accepted my first Calstrs job.

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