CalSTRS pensions grew faster than pay, inflation

A new look at how CalSTRS members changed during the last 15 years shows the average teacher working fewer years, retiring at an older age and collecting a pension that grew faster than pay or inflation.

Retirees grew much faster during the period than active workers, increasing from 27 percent to 36 percent of total membership and raising questions about the impact of longer life spans on projected pension costs.

The new CalSTRS demographics report issued last week, done in part to show differences among employer types, covers a period beginning in fiscal 1997-98 as a stock-market boom yielded big earnings for pension fund investments.

A brief pension fund surplus helped prompt legislation in the late 1990s and 2000 that increased pension benefits in several ways, while also cutting the annual employer and employee contributions to the pension fund.

According to the new report, the average final compensation of a K-12 teacher increased 54 percent during the 15-year period, growing from $52,200 in 1997-98 to $80,500 in 2012-13.

The average CalSTRS pension benefit for a K-12 teacher increased 70 percent during the same period, growing from $28,309 in 1997-98 to $48,094 in 2012-13. The California consumer price index grew 48 percent.

“The reason why the benefits went up is during that period of time there were changes in the benefit structure, which improved benefits for the majority of our members, so they are getting a bigger benefit,” Ed Derman, CalSTRS deputy chief executive officer, told the board.

“For people retiring after the benefit increase, the benefit is going to be greater for a given compensation than people who retired in 1997-98 — one-year final compensation, increased age factor, longevity bonuses, a whole variety,” he said.

In addition to a number of small benefit increases, the state CalSTRS contribution was cut from 4.6 percent of pay to 2 percent. For 10 years, a quarter of the teacher contribution, 2 percent of pay, was diverted to a new pension supplement for teachers.

The California State Teachers Retirement System funding level peaked in 2000 at about 110 percent of the projected assets needed to pay future pension obligations. In the latest actuarial report as of June last year, the funding level had dropped to 67 percent.

A Milliman actuarial report last year said CalSTRS would be 88 percent funded if it had continued to operate under the contribution and benefit structure in place in 1990, without the changes that began 15 years ago.

Now legislation last June phases in a $5 billion CalSTRS contribution over seven years. Most of the money comes from school districts, whose rates will more than double from 8.25 percent of pay to 19.1 percent of pay by July 2020.

Teachers in CalSTRS do not receive Social Security in addition to their pensions, unlike state workers and many local government employees. A report several years ago said CalSTRS pensions and supplements usually replace about 70 percent of job income.

STRS

Retirees living longer than expected is one way pension funding can fall short, much like overly optimistic investment earnings forecasts.

CalSTRS was told last month more than a dozen financial experts expect annual earnings of 7 percent or less next decade, below the 7.5 percent CalSTRS assumption.

The report last week that retirees are a growing percentage of the total CalSTRS membership led a board member, Paul Rosenstiel, to ask several questions about the accuracy of CalSTRS mortality projections.

Last month the Society of Actuaries released new mortality tables showing that males age 65 are expected to live to age 86.6, two years longer than expected in 2000. Women age 65 are expected to live to age 88.8, an additional 2.4 years.

“The Society of Actuaries estimates there could be a four to eight percent increase in private pension plan liability,” said its news release. “This average cost impact will vary greatly according to the design and demographic profile of each plan.”

With an eye on earlier versions of the Society’s first mortality update in 14 years, the California Public Employees Retirement System approved an employer rate increase in February to cover the cost of retirees living longer than previously expected.

The CalPERS rate increase, based on males living two more years and females 1.5 years, is expected to add $1.2 billion a year to the annual employer cost for state workers when fully phased in after three years.

The rate hike for increased longevity was the third CalPERS rate increase in the last two years, following a lowering of the earnings forecast from 7.5 to 7 percent and the adoption of a new actuarial methodology aimed at getting to full funding sooner.

CalSTRS lacks the power to set annual rates that employers must pay, needing legislation instead. The Legislature, willing to tolerate funding shortfalls, ignored CalSTRS pleas for a rate increase for years before approving the funding solution in June.

The new legislation gives CalSTRS limited power to raise rates: an employer increase (no more than about 1 percent of pay) after 2020 if needed for full funding by 2046; a state increase after 2016 if needed to eliminate benefit debt prior to 1990.

A CalSTRS board decision to lower earnings forecasts or increase longevity forecasts might have little impact, other than to alert the Legislature that a CalSTRS funding gap is reopening.

As part of a routine review every four years, CalSTRS is scheduled to look at the forecasts for investment earnings and longevity in 2016. It’s possible that the board, which has a long-term outlook, will make no change.

In the earnings review, as reported last month, CalSTRS will look at factors such as a 30-year investment horizon, what could happen during market booms and busts, and the possibility that inflation might offset a lower earnings forecast.

In the longevity review, the experience of CalSTRS members, who tend to have healthy lifestyles, and the Society’s new update will be used, said Rick Reed, CalSTRS actuary. He said teachers may have already made the gains shown in the new tables.

“We don’t know that our study is out of date,” Reed told the board. “As a matter of fact, because teachers have been living longer for a long period of time what we have found is that other groups are catching up.”

A Milliman actuary, Mark Olleman, agreed that the current longevity forecasts used by CalSTRS are not out of date. He said reviewing assumptions every four years is a “very responsible” schedule.

“CalSTRS is a very large, credible population to look at, and your mortality assumptions are based on the actual mortality of the California teachers,” he told the board.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 10 Nov 14

30 Responses to “CalSTRS pensions grew faster than pay, inflation”

  1. Dr. Mark H. Shapiro Says:

    This is downright un-American. Here in the U.S. we expect people to retire into a life of poverty, or to keep working until they drop dead just to get by.

  2. Tough Love Says:

    No Doc, what’s downright Un-American is that Public Sector Unions can (and have and do) BUY (with Union campaign contributions and election support) the favorable votes of our legislators necessary to grant the current GROSSLY EXCESSIVE Public Sector pensions in place throughout CA and most other States and Cities.

    Those (such as yourself) who suck at the taxpayers’ teat should have “Plan B” for retirement income, because the only unknown is WHEN (not IF) your pension Plans will fail with very material reductions to promised payouts.

  3. SeeSaw Says:

    And, how about the cost of food these days? I am sure food costs are rising faster than inflation and faster than pensions. It costs 99 cents for one cucumber, for heavens-sakes! I just paid $42.37 for three Thanksgiving pies from Marie Callendar’s!

  4. SDouglas47 Says:

    TL, other than, you know, your opinion, do you have any empirical evidence of this alleged collusion between public unions and legislators?

    Do you have conclusive evidence, other than your opinion, that public sector pensions are, in fact, “GROSSLY EXCESSIVE” when considered in the context of total compensation?

    You may be familiar with Josh Rauh, not normally considered a union thug. Notes from his participation in a conference on Government Unions in the United States:

    “A related question at the conference was whether public sector collective bargaining and public sector unionization actually succeed in raising compensation. Here there was in fact no conclusive evidence. A number of speakers noted that it is possible for workers to be unionized but lack collective bargaining rights. Neither collective bargaining nor unionization seemed strongly correlated with compensation in the studies that were presented — although it is impossible in this setting to have counterfactuals (that is, to know what a given public sector employee would have earned in the absence of the union’s influence).”

  5. Captain Says:

    “Those (such as yourself) who suck at the taxpayers’ teat should have “Plan B” for retirement income, because the only unknown is WHEN (not IF) your pension Plans will fail with very material reductions to promised payouts.”

    TL, the initial fall-out from these CalSTRS increased benefits, and soon to be very costly increased costs to school districts statewide, will be struggling school districts. In my neck of the woods districts have been crying poverty for several years. In other areas we have districts that have been taken over by the state. The request for school bonds and parcel taxes are never ending. Now we are about to see pension costs begin their escalation from 8.25% of payroll to over 19.1%, and those increases will strangle budgets throughout the state.

    To make matters worse, the California State University system is proposing increased tuition hikes of 5% per year or the next five years (a componded 27.6 percent). That is on top of the current costs that have already outpaced inflation for probabaly a decade or more. Beyond the tuition cost increases, fees for everything related to higher education are spiraling north.

  6. SeeSaw Says:

    I doubt TL was ever at a union meeting in his life! I never attended a union meeting where any arrangement between our group and a politician was ever discussed. The subject was always an update on negotiations for salaries and benefits–with management, who were not elected politicians. I wonder how much proof TL has that Sheldon Adelson and the Koch Bros. don’t purchase politicians with many times more millions than unions have. TL seems to go around with a sour stomach 24/hrs. a day! He must be a joy for anyone who knows him personally!!

  7. SeeSaw Says:

    SD47, it is also possible for a group to have collective bargaining rights without being unionized. That type of situation existed at my municipality for about 20 years before it was decided to join with a professional association to represent us before management.

  8. Captain Says:

    SeeSaw Says: “I never attended a union meeting where any arrangement between our group and a politician was ever discussed.”

    SeeSaw, does that mean it never happens? Or are you just not privy to the backroom dealings? It happens all the time and, In California, it is common practice.. It is fairly typical for the unions to ask for a written pledge from their potential candidates prior to both endorsement and funding. I’ll call it a fairly standard practice.

  9. SDouglas47 Says:

    At a conference on Government Unions in the United States. Scholars from economics, finance, law, and political science presented their research on an number of different dimensions of this theme.
    ………………..
    “A related question at the conference was whether public sector collective bargaining and public sector unionization actually succeed in raising compensation.”

    “Neither collective bargaining nor unionization seemed strongly correlated with compensation in the studies that were presented ”
    …………….

    If the experts say there is no correlation between unions and compensation, there is by extension no collusion. So, SeeSaw is correct; it never happened.

    http://kelloggfinance.wordpress.com/2011/10/16/government-unions-and-public-sector-compensation/

  10. Stuart Mill Says:

    One one correlation that is absolute, is the declline of quality of life for residents as public unions have gained more influence, unless you are a member of the public unions. There is no doubt that that the standard of living will continue to decline to support the current day Ancien regime, It ended then, it will end again.

  11. SDouglas47 Says:

    Where do you guys get this stuff? Books? Websites? Ultra high frequency radio waves?

    The correlation is not absolute.
    Correlation is not causation.
    Public unions have much less influence than you imply.
    Your inference that public unions are prospering at the expense of others is not supportable.
    The decline in the quality of life, “if” it exists at all, is a result of normal business cycles and changing world economic dynamics.
    I do like the ” Ancien Régime” reference though. It’s bullcrap, but it’s fresh bullcrap.

  12. Captain Says:

    Sdouglas, I disagree with both your comments and faulty logic. You quoted the following:

    “Neither collective bargaining nor unionization seemed strongly correlated with compensation in the studies that were presented ”.

    – So they aren’t really saying there isn’t a correlation, are they? But here you go drawing erroneous conclusions based on your own opinion and faulty logic:

    “If the experts say there is no correlation (?) between unions and compensation, there is by extension no collusion. So, SeeSaw is correct; it never happened.”

    – What??? Again, when did the experts say there is no correlation between unions and compensation?

    I beg to differ for many reasons you seem to ignore. The collusion issue is alive and well, at least in the Golden State, and it has raised compensation well beyond inflation.

    And that doesn’t even include the hyper-inflationary costs of pensions.

  13. Captain Says:

    “Stuart Mill Says: One correlation that is absolute, is the decline of quality of life for residents as public unions have gained more influence, unless you are a member of the public unions. There is no doubt that the standard of living will continue to decline to support the current day Ancient regime”

    – Well said, Stuart.

    It is already happening as money once spent on road maintenance, infrastructure, basic services, mental health services and school programs are being diverted to emplloyee compensation, retiree health care benefits, and pensions. And, now, we’re seeing increased taxes to pay for the very things are tax dollars were meant to pay for.

    The funding for items that represent the most basic communal needs, the fabric which holds our communities together really, is disappearing before eyes. Our public services are becoming a financial nightmare whereby the service providers have become monopolistic tyrants. There’s irony in there somewhere.

  14. SeeSaw Says:

    What absolutley, outrageous, hideous, drivel!!!!! Every entity must have a general fund in order to provide the services needed by its residents. The economic condition of each will determine what each can provide and how it will be provided. First comes a budget which determines the size of the workforce and the equipment needed. Pensions are one line-item on the budget. The economic condition of the country today was caused by 60,000 factories closing during the Bush administration, causing 26,000,000 people, who were used to having work, to be out of work. That was before the global economic collapse of 2008–caused by Wall Street–the private sector! Get real you people and stop blaming your public-sector neighbors who happen to be taxpayers in your own neighborhoods, for current economic conditions!

  15. SDouglas47 Says:

    In spite of all the horror stories and hyperbole, most actual statistical evidence shows that public sector workers earn roughly the same compensation as equivalent private sector workers, including the cost of all benefits.

    The one dissenting study shows the average public worker earns about 12% less in cash wages, but 20% more in total compensation, the main disagreement is in the “proper” valuation of retiree benefits. Even this most conservative study says that those public workers in higher educated and professional positions earn less, both in cash wages and in total compensation. Much less.

    “Powerful Public Employee Unions” is an oxymoron. Business interests spend much more on lobbying and campaign finance collectively than unions could ever hope to. There are enough public employees to swing almost any state or local election, if they vote as a bloc.

    But they never have.

    One of the first contracts negotiated between state unions and the Department of Personnel Administration. Included a cost of living increase and increase in healthcare. DPA agreed the increases were equitable. The legislature did not disagree about the fairness, but said it just wasn’t in the budget. They cut the total amount in half, and said “split it up however you want.”

    What we have come to know as “collective begging.” Ancien Régime is all in your fervent imagination.

  16. Stuart Mill Says:

    The Leninists dogma and their embrace of public confiscation of private capital is well illustrated by the preceding posts defending the states quo. Note the attacks on the private sector profoundly illustrating this premise.

  17. SDouglas47 Says:

    Who is attacking the private sector?

  18. Stuart Mill Says:

    “That was before the global economic collapse of 2008–caused by Wall Street–the private sector! “

  19. SeeSaw Says:

    Now, I have seen everything! SM, go out and rent a copy of the movie, “Inside Job”. ( It won the Oscar for best documentary of the year it was out–I believe 2010.) Since the collapse in 2008, we public-sector workers have been called every name you can think of. A few that were directed at me–“greedy”, “trough-feeder”, “santimonious SOB,”, “the epitome of avarice and greed”. I have yet to see any of you name-callers bring forth one documented scenario where bribery and money is exchanged between a public-sector union and a politician–granted, there are good people and bad people all around–in every sector. Now I come along with a statement that is actual fact about the private sector, and your shorts are twisting around!

    In case you are not aware, every one of us is connected with the private-sector in some way. I worked in the private sector myself when I came to CA. My spouse worked as a carpenter in the private sector for 50 years. He did everything he was supposed to do–he went to apprentice school, and spent the requisite five years working before he became a Journeyman. He had a union and benefits! All came crashing down in the early 80’s when the illegals started showing up, offering their “skills” for a pittance. By 1986, the builders and land developers had canceled all union contracts in the housing industry in our area–the new work force was illegal, by the way–again, fault of the private sector. My spouse now gets a defined benefit pension from the Carpenter’s union. It had been frozen in 1986, never again to gain one more penny, including interest. It doesn’t pay the cost of the ABC medical insurance premium which is secondary only to Medicare. So that’s the “gravy train”, we are riding now. We pool our pensions to pay our living expenses–thank god, mine is from the public-sector.

    Have you noticed that SD47 is the only poster that comes on these boards with documentation to back up what he is stating? Even then, you and others here are going to deny, deny, deny!

  20. Stuart Mill Says:

    Businessmen are always greedy. That is capitalism. It is the job of honest people in govt roles(public sector) to control that. Instead, the govt colludes with the private sector for personal benefit(power, greed). This is fascism. That is a fact. To circle back: the pursuit of member benefits via lobbying/contributions to the govt officials(elected and appointed) is where we are at with govt unions. They is no different from the private sector lobbying/contributions.
    It is easy to deny if one if one is the benefiary of the lobbying, whether in the public or private sector.
    Read David Stockman from the Reagan administration. Is that factual enough for you?

  21. SeeSaw Says:

    David Stockman is an op-ed writer–not factual. Facts come from research.

  22. Stuart Mill Says:

    Thanks for the research into his background. Best to stick to the reliable sources you use and have served you well. Goodbye. Keep talking to the choir.

  23. SeeSaw Says:

    I have done no research on DS’s background–As I think I recall, he was a budget director for Reagan who did not agree with Reagan’s trickle-down theory. How much research have you personally done on the damage done to the economy by public-sector pensions vs. the loss of 26,000,000 jobs nationally in one administration? I was referring to research studies on public-sector vs. private-sector salaries and benefits. I believe the studies before I am going to swallow the opinions of some op-ed pundit. As for you, keep on pandering to the Koch-heads.! And, I trust, you are going to view, “Inside Job”–partner it with the drama, “Margin Call”, and you will have a good picture oft Wall Street’s responsibility/criminality for the greatest recession the middle class has suffered since the Depression.

  24. spension Says:

    Compensation has roughly 3 parts… salary, pension, and healthcare, ignoring some smaller stuff.

    Without a breakdown I can’t get too excited.

  25. jon Says:

    CALSTRS is much less generous than CALPERS. Teachers earn 2 percent times years of services after 30 years AND age 60. Plus they do not get social security. CALPERS workers get 2.5 to 3% at age 55 plus they also get COLAS each year after they retire. If the CALSTRS formulas replaced all the CALPERS formulas the entire funding problem would disappear.

  26. Captain Says:

    Jon, your comments are grossly inaccurate and understate both the CalSTRS giveways, which increase the retirement funding levels their members receive, as well as the pension formula (which peaks at 2.4@63). They also receive a modified social security benefit. That means they do receive social security benefits for years they’ve worked in the private sector assuming they worked the required number of quarters to qualify under the SS guidelines, which many do.

    Jon, your post is way off base.

  27. Captain Says:

    spension Says: “Compensation has roughly 3 parts… salary, pension, and healthcare …”Without a breakdown I can’t get too excited.”

    Spension, you are much too educated on this topic for you to make a non-comment – comment. I’m interested in your honest opinion on this topic.

    The topic is CalSTRS pensions grew much faster than inflation, (and) pay. That’s 2/3 rds of what you can’t get excited about, and I’m sure the Healthcare issue, even if not mentioned, is a factor.

    How can we help to get this problem solved? What will it take? Do you think there is any solution that doesn’t include a ballot initiative?

  28. Jon Says:

    No, Captain my comments are not off base. While I can agree that benefit increases have clearly contributed greatly to CALSTRS problems my point is that CALSTRS is really not that generous in comparison to CALPERS. CALSTRS pensions are growing because teachers are waiting much longer to retire which allows for a higher pension. As far as SS you are way off base – the years worked in the private sector are almost pointless as the formula forces them to surrender practically the entire benefit. My other point about SS is that many CALPERS members both pay and get social security so CALSTRS members only have this pension to rely on.

    Compare for yourself the pension a person retiring from CALPERS vs. CALSTRS at age 55 and 60 would get with 25 and 30 years of work. CALPERS formula is 3% vs CALSTRS at 2%. California could wipe clean the problems of pensions if all workers used the CALTRS formula. That would not be exactly fair to the CALPERS workers who have worked under the assumption of the larger formula. Nonetheless, this would have a clear net positive effect for the state.

  29. spension Says:

    Captain, are you sure that the pension portion, and not the health care portion, of total compensation that is responsible for total compensation growing faster than inflation?

    I would note that pension compensation is different than the yearly pension contribution by the state.

    In any case, the solution does depend on where the growth is coming from. If the bank-breaker is healthcare we do a different thing than if the bank-breaker is pension. Remember, we are not talking about overall pension debt, which is a terrible problem, but just a different problem than compensation growing faster than inflation.

    Healthcare is a terrible problem in the US… as far as I know it is common for employees of all institutions (private & public) to pay skyrocketing costs and get worse and worse healthcare outcomes.

    The *salary* increases of executives in the non-profit healthcare industry run far, far ahead of inflation. They are getting fantastic compensation bumps for a system that just gets worse and worse and worse. That is a huge problem, but it it also politically a third rail.

  30. Captain Says:

    Jon Says:

    “While I can agree that benefit increases have clearly contributed greatly to CALSTRS problems my point is that CALSTRS is really not that generous in comparison to CALPERS.”

    – I think you’re correct that benefit increases have greatly contributed to CalSTRS problems, taxpayer problems really – and in a big way. To your point that CalSTRS is less generous than CalPERS is like saying two wrongs make a right. Your argument falls flat.

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