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California State Teachers’ Retirement System Is Grossly Underfunded

California State Teachers Retirement System Is Grossly Underfunded

Posted: Nov 02, 2015 | Author: | Comments: 0

According to a recently released Legislative Analyst report, the California State Teachers' Retirement System is currently suffering $73 billion in unfunded pension debt. It seems that because of this staggering number, CalSTRS is attempting to use doubtful figures to minimize the debt by not accounting for expenses that it should be accounting for. Instead, it is pushing these expense off into the future, creating unfunded liability.

How Does the Pension System Work?

According to the LAO, "CalSTRS has administered its main pension program, which (1) receives contributions from members, school and community college districts, and the state; (2) invests those contributions; and (3) uses its assets to provide a specific monthly pension benefit to retirees and their beneficiaries. Retirement programs of this kind are known as Defined Benefit programs." In this system, employees contribute 8 percent of their pay while districts contribute 8.25 percent of payroll. The state pays about 5 percent of teacher payroll and to a companion program, the Supplemental Benefit Maintenance Account.

What Is The Issue?

According to the California Legislative Office (LOA), "If the state’s current $1.4 billion annual contribution to CalSTRS were combined with the $4.5 billion additional contribution that may be necessary to achieve full funding in 30 years, the sum would exceed state spending on the University of California and California State University systems combined…The additional CalSTRS contribution alone would represent about one-half of state corrections spending." This report shows that the pension rate of return practice and the contribution rates by state employees are at odds with reality.

Many blame this high amount of debt on the recession. However, the recession did not cause the debt, it merely exposed it. According to the California Taxpayers Association, "The retirement system’s defined-benefit program was fully funded in 1998. Then, under Governor Gray Davis, the state increased member benefits and reduced state contributions. By 2003, the unfunded liability was $23 billion." This was well before the 2008 recession crisis.

According to Stanford Professor Joe Nation in the 2011 study, "Pension Math," "generally, pension systems strive for a funded status of 100 percent over the long term." He concludes that the current rate of funding for CalPERS (the California Public Employees' Retirement System) is only 58.3 percent while CalSTRS is at 60.0 percent. If private-sector pension plan funding falls below 80 percent, which both do, they are labeled "at risk."

Are There Any Solutions to the Funding Problem?

Nation identified several viable solutions to the pension crisis including revenue increases and reforms to public employee pension systems. However, either option is unlikely to happen any time soon. Nation wrote in his study that, "Revenue increases are unlikely to be approved absent pension reforms…Required pension system reforms include benefit reductions, such as prospective reductions for current employees, greater cost sharing, and governance reforms, particularly changes in pension system accounting methods and assumptions."

Without any changes made, it is estimated that CalSTRS will deplete its assets by 2044. Private sector funds are also only expected to grow 4 to 5 percent annually. While state employees have been promised a pension, it may not be in the future.

However, there are options for those who want to plan better for retirement, especially in the instance that the retired employee's pension is cut. One way to supplement your income during retirement is through a retirement savings plan. The team at Ed4Ed is here to offer you a wide breadth of information on retirement planning options. Our information can help you make an informed decision about what saving options are available to you to ensure you are financially secure during retirement.