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.
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).