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Lesson 3.11

Pensions:
How Good is a Teacher's Pension?

Teaching pays better than you think, because…

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It is easy to underestimate the total value of teacher pay because a lot of it comes after retirement, in the form of pension payments.

Teachers aren't lavishly paid, but it's easy to underestimate the true value of a teacher's total compensation. For full-career teachers, each year of teaching comes with a significant promise toward a financially secure retirement.

This lesson explains how teacher pension systems work, how they are different from Social Security, how to compare them with other retirement systems, why older teachers stop agonizing about retirement at age 62, and why younger teachers will agonize about it until they are 65.

Teacher pay is better than it looks

A teacher's total pay is better than it looks. (Unless something goes terribly wrong, that is. It could. But we're getting ahead of ourselves.)

Teachers' pensions in most states, including California, are defined benefit systems. After retiring, teachers receive pension payments in a manner defined by the rules of the pension system.

Most workers pay into Social Security. California government workers pay into CALPERS. California teachers pay into STRS. (It's pronounced "stirs").

The pension system for teachers is a defined benefit system. While working, you pay the system. After you retire, the system pays you. How much? It depends. The amount you get out of a defined benefit system in retirement does not necessarily reflect the amount you pay in. Instead, the amount that the system pays out is determined by a formula.

For public school teachers in California, the pension formula depends on just three things: Your end-of-career pay, the number of years you have been teaching in California public schools, and your age at retirement:

STRS is like Social Secruity for teachers. Sorta.

California’s state pension system for teachers was created in 1918, long before Social Security was founded in 1935. In 1950, states were given the option to merge their pension systems for public employees into the Social Security system. California and 13 other states, in whole or in part, have opted not to do so, instead maintaining separate retirement systems for public school teachers.

Teachers in California don’t pay social security taxes on their paychecks or receive social security benefits. Instead, they pay into STRS, which stands for the State Teacher Retirement System. The acronym is treated as a name, pronounced “stirs”.

STRS is superficially similar to Social Security. In both systems, a portion of gross wages is withheld from each paycheck. Both systems make payments to members after retirement. In both systems, your age at retirement matters. You get more money if you defer retirement and retire later.

There are important differences, though. The Social Security system describes itself as an anti-poverty program. It doesn't differentiate the age at which you make your money, the kind of work you do, the state you live in, or the number of years you have worked in a particular profession.

These are central factors in the California STRS system because it has a particular mission: it is designed to provide a strong life-long pension for those make teaching in California’s public schools their life's work. According to STRS, about half of California's teachers stay in the profession for at least 30 years.

How does California’s teacher pension system work?

Public school teachers in California join the CALSTRS pension system automatically with their first paycheck. For as long as they work as a teacher in a California public school (pre-K through community college), a portion of gross pay (about 10%) is pulled out as a required contribution to the system. After retirement, teachers stop receiving paychecks from their school district and start receiving payments from STRS, instead. (Confusingly, STRS calls these after-retirement payments benefits. It’s easier and more accurate to think of them as income, as tax authorities do.)

California's teacher pension system has gone through significant changes over time in order to ensure that the system is financially sound. Among the changes, the retirement terms for teachers were adjusted to make it a bit less attractive to retire early. For teachers hired after Jan 1, 2014, the system is described as 2% at 62 because those who retire at age 62 (generally) receive an annual retirement benefit for life equal to 2% of their final salary times the number of years served.

For teachers hired prior to Jan 1, 2014, the system is described as 2% at 60. The system is similar, but more generous — it offers full lifetime retirement benefits earlier. In both cases, the system strongly rewards teachers who delay retirement and continue teaching longer.

The chart below shows lifetime compensation for “Bee,” a hypothetical teacher who begins teaching in Oakland Unified School District in 2022 at age 29 (the STRS average age). Over time, she earns degrees that boost her pay. She retires at 65 (the pension-maximizing age), and lives to 91 (the STRS forecast average for female teachers. For men the average is 88.)

The point of a defined benefit pension is security. Pensioners know they will receive predictable, ongoing money in retirement for as long as they live, even if the market swoons. As of 2021, the California STRS record for most years of pension payments was set by a teacher who lived to 108.

The chart above shows when teacher pension payments are delivered. It’s worth understanding when they are earned.

Teachers qualify to receive a pension in retirement only if they work in the system for at least five years. Each service year thereafter affects the calculation of their annual pension in retirement. Teachers are eligible to retire at age 55, but the system is set up to encourage long service, especially from age 56 to 65. Teachers qualify for a big portion of their pension in those years:

Using the same assumptions, the next chart puts it all together. For each year that Bee works, this chart shows how much she receives in salary (teal), how much she pays in to STRS (yellow), the incremental cumulative lifetime value of expected future pension payments (orange), and the one-time value of each pension payment she skips by continuing to work (grey).

What is the 2% at 60 system?

As mentioned above, the teacher pension system works differently for teachers hired before Jan 1, 2014 than it does for those hired after that date. For those teachers, the system is known as 2% at 60. There are several important differences.

  • Earlier retirement. Rather than at 65, teachers reach the maximum offered pension at age 63 — or as early as age 61½, if they have been working in the system for 30 years.
  • Fewer limits. STRS members that qualify for the 2% at 60 system have access to some benefits that have been capped in the newer system. Some of these limits apply only to members with unusually high salaries.
  • Purchase of service credit. Under limited circumstances, the STRS system (like other defined benefit systems) allows educators to purchase service years. When offered, the price differs between the two systems.
  • Huge pension incentive at 30 years. As shown in the chart below, the 2% at 60 system includes an extraordinary perk, known as the career factor (or the longevity bonus) that further accelerates qualification for the maximum pension of 2.4% of final salary times each year of service. It's a single-year incentive approaching $300,000 in lifetime pension value.

Why did California’s teacher pension system change?

Pension systems are built on some critical assumptions. Will the number of working teachers increase? How many years will teachers work? How long will they live? How will prices change over time? Will invested assets grow in value? By how much and when? Will policies change?

For decades, California’s pension systems seemed magical. California was growing, with young teachers joining in droves. Teachers were required to contribute just six percent of their wages toward their retirement system, but the math worked. STRS had amassed a big investment fund that was delivering remarkable earnings, especially from tech investments. In the dot-com boom of the late 1990s, California's public pension systems appeared to be overfunded, so the legislature generously changed the math to create the 2% at 60 system, lowering retirement age requirements and raising benefits.

Big mistake. On cue, the boom went bust.

The pension system relies on ongoing support from taxes

The charts above probably seem out of balance, right? How can such small contributions (the small yellow bars at the bottom) balance the large pension payments represented by the orange bars?

They can’t. The STRS system relies on money from four sources:

  • Income generated by investments held in the STRS investment portfolio;
  • Contributions required from teachers;
  • Contributions required from employers (e.g. school districts), tax-free; and (when all else fails)
  • Money from the state budget.

There’s no free lunch here. Money that school districts must spend on pensions for retired teachers is money they can't spend on other priorities — including educating today’s students.

For two decades after the tech bust, even as the stock market grew, the STRS investment portfolio fell behind, gradually losing its capacity to sustain the state’s obligations to teachers. The STRS account’s funded ratio shrank from better than 100% funded to about two-thirds funded, and financial experts (actuaries) warned that, without action, the fund would be depleted by 2046. A pension fund can weather bad years if it is healthy. An unhealthy pension fund is a time bomb, just waiting for the next bad year to turn into a disaster.

As one of his final acts in office, Governor Jerry Brown pushed through a 32-year plan to defuse the pension time bomb. The plan clarified the state’s commitment to serve as the funder of last resort, but in exchange it required higher contributions from both teachers and school districts. The plan is expected to bring the system to full funding by 2046.

Higher state and local contributions can improve the financial health of the teacher pension system, which is great. But the money isn't coming from a magic well — it's mostly coming from school district budgets.

The legislature broke the teacher pension system in the dot-com era

If you hear that the state budget is going up, but your school is making cuts, now you know a big part of the reason why: the legislature broke the teacher pension system in the dot-com era, didn't fix it for ages, and now the bill is past due.

This video from EdSource.org does a great job of summarizing the issues.

In 2020-21, the market delivered extraordinary returns for the STRS account. Even the bad year of 2021-22 didn’t wipe out the good news:

In late 2022, the stock market continued to slide and inflation hammered the value of the system's bond portfolio. The fund includes many long-term investments that can help it weather short-term downturns, but these investments are illiquid, which means they can't easily be sold to make pension payments. If the overall holdings of the system shrink too much, it can't safely hold as many long-term investments. To be safe and effective, defined-benefit pension funds need to be big.

What if teachers also earn Social Security wages?

The Social Security system is important to many teachers because, in the course of their career, many have other jobs. A person who works part of a career in STRS employment and part of a career in "regular" employment, paying Social Security taxes, may qualify for retirement benefits from both systems.

There's a wrinkle. As described above, the STRS system is set up to strongly reward high end-of-career earnings. The Social Security system is set up in a roughly opposite way; it is progressively indexed to provide extra support to those with low total earnings. This has a practical impact: If you pay in only a small amount to Social Security, the system assumes that you need more support.

To prevent abuse of this progressive indexing, Social Security has a windfall elimination provision that discounts STRS receipts. The interaction of these systems is complex, and some argue that the Social Security rules amount to a "hero's penalty" that discourages work.

Why are pension systems so complicated?

Some of the complexity exists to address what-if questions that represent less-common but real cases, such as the interaction of STRS with Social Security. There are many others. What if a teacher is called to military service? What if a teacher needs to take time out for cancer treatments? What happens if a teacher is accepted for an overseas fellowship? What if a teacher's district wants to offer an incentive for a teacher to retire early?

To address issues like these, the system has to embrace some complexity. In 2021, CALSTRS had about 1,200 employees to support a system of nearly a million educators, about half of them active. The following video explains some of the challenges, such as systemic vulnerability to abuses like spiking, in which teachers or employers exaggerage end-of-service payments for the purpose of driving up pension obligations.

What is a defined contribution pension system?

Some argue that the best "fix" for the teacher pension system would be to abandon it in favor of a defined contribution system, the structure overwhelmingly used in the private sector. In a defined contribution system, there is no central retirement fund. Instead, individuals are responsible for saving and investing in their own retirement. Usually, employers encourage employees to invest for retirement by matching the funds they commit to their retirement account, with the requirement that money not be withdrawn until retirement. These retirement savings accounts are allowed to grow tax-free until withdrawn at a specified age.

In the private sector, this kind of savings instrument is called an IRA or 401(k) account. Similar savings accounts exist to help educators save for retirement — they are known with names like 403(b), 457(b), Roth 403(b), and Roth 457(b). In California, teachers can use these accounts as supplementary ways to save for retirement. Some states, including Florida, Alaska, Washington, and Kansas have transitioned away from defined benefit systems for teachers, making these saving accounts the primary retirement security system for teachers.

Defined contribution systems generally don't include age-based incentives for employees to continue working — or, for that matter, to stop working. For arguments in favor of defined-benefit systems for teachers, read this analysis by the Fordham Foundationof the pension system in Los Angeles Unified. For the opposite view, read the analysis of theBerkeley Labor Center.

Are teachers pensions safe?

A central concern of each of any retirement system is risk. Is there enough invested to weather bad financial conditions? With the changes made in 2014, California's teacher retirement system seems likely to be on a long, slow path to sustainability. Unless, of course, something goes badly wrong.

California's STRS system is huge, but it is far from the only one. In 2021, the US Census Bureau estimated that there were 299 state-level pension systems for public employees and 5,977 local systems. Collectively, these systems manage the investment of trillions of dollars in pension savings.

The scenario that keeps economists and bankers up at night is the prospect of collective risk. Adverse market conditions don't just affect one pension system at a time — in a truly awful downturn, many public pension systems would be stressed at the same time. Some would not make it. The Social Security system looms large in conversations about the financial risks of retirement insurance systems. Actuaries warn that the system has been out of balance since 2010.

Does California have a good teacher pension system?

Pension systems serve different stakeholders in different ways. California's system works mainly to the advantage of full-career teachers, especially those that start young, earn lots of graduate credits, and retire at the optimal age. In a 2021 review of state teacher pension systems, Bellwether Partners ranked California's system among the ten worst in America.

How do teacher pensions actually affect students?

An out-of-balance pension system can seem like an abstraction, but it matters a lot. The California STRS pension system went from fully funded to dangerously out of whack in about two decades. Putting it back on a path to sustainability will divert huge amounts of money from school budgets and government services for decades more. The obligation to rebalance the pension system also reduces funds available for other growing costs, like health care costs and deferred maintenance costs for aging school buildings. A 2018 analysis by WestEd argued that the combination of these factors amounts to a Silent Recession.

This post concludes the "Teachers" chapter of Ed100. The overall structure of Ed100 is "Education is Students and Teachers spending Time in Places for Learning with the Right Stuff in a System with Resources for Success. So Now What?"

In the next chapter, we tackle the educational implications of life's most precious resource: Time.

Sources: Ed100 pension model, CalSTRS Retirement Calculator, CalSTRS Member Handbook.

Extensively revised July 2018
Updated September 2018
Updated Oct 2018 with GDTFII findings.
Updated April 2019 with EdSource video.
Updated December 2019
Updated October 2022

Quiz

One of the following statements about California teacher pensions is FALSE. Which one is it?

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Questions & Comments

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user avatar
Carol Kocivar June 14, 2022 at 12:59 pm
For those who want to dig even deeper into pension funding issues, the legislative analyst weighs in on Strengthening the CalSTRS Funding Plan.
Specifically, we recommend that the Legislature consider the following changes: (1) allow CalSTRS to increase the state’s contribution rate by more than is currently allowed; (2) eliminate the complex theoretical calculations currently used to determine assets and obligations assigned to the state and employers in favor of a fixed proportional division of UAO; and (3) make the provisions of the funding plan ongoing, allowing CalSTRS to develop an amortization policy to address future losses in line with industry best practices.
https://lao.ca.gov/Publications/Report/4400#LAO_Comments_and_Recommendations
user avatar
Carol Kocivar June 5, 2022 at 5:51 pm
Expensive, Inequitable, and Out of Reach: The Problems With California’s Teacher Pension System— and What Can Be Done :The Opportunity Institute

"The high cost of the pension system is due to chronic underfunding, not lavish benefits for teachers. In fact, CalSTRS provides most of California’s teachers with a low-quality benefit. Only 72 percent will vest and qualify for a pension at all. In the end, only 33 percent of teachers serve in California’s schools until they reach normal retirement age. And since the state does not participate in Social Security for educators, those teachers who leave the profession or move to a new state are in worse shape financially than they would otherwise be."

https://static1.squarespace.com/static/55f70367e4b0974cf2b82009/t/6226b50e84747636bf106df6/1646703893640/California+Pension+Brief+Final.pdf
user avatar
Carol Kocivar June 5, 2022 at 3:45 pm
Can states clean up their teacher pension messes? Thomas Fordham Institute

Traditional pensions fail to justly compensate a large portion of teachers for their work every year in the classroom. They’re often massively expensive and incredibly complicated. Over the past decade, retiree benefits have been in flux. But all is not lost. Policymakers have options that can make retirement more fiscally sustainable and fairer to a next generation of teachers. It’ll take much hard work, but kicking the can down the road is a short-sighted option.
https://fordhaminstitute.org/national/commentary/can-states-clean-their-teacher-pension-messes
user avatar
Jeff Camp - Founder April 23, 2022 at 1:10 pm
In 2022, the Opportunity Institute criticized the structure of the STRS system as expensive and inequitable, emphasizing the fact that California teachers receive no pension at all for their first five years in the system.
user avatar
Jeff Camp - Founder September 30, 2021 at 10:53 pm
In September 2021 Bellwether Education compared the services and soundness of teacher pension systems in each state, assigning letter grades based on many criteria. California earned an F. The report emphasizes how back-loaded the system is. It's a golden handcuffs system.
user avatar
John Buck January 15, 2019 at 12:20 pm
Thanks for the article. My interest is in how the amount of the pension (and other benefits) is determined. In CA, it appears the amount of the benefit was determined by the Legislature. Can you confirm that? In what states are such benefits determined by the local school board?
user avatar
Jeff Camp January 15, 2019 at 12:56 pm
In California, the pension rules have been set by the legislature, but health and other benefits are locally negotiated through collective bargaining. Variations can make it difficult to compare true differences in compensation between districts. In other states teacher pension systems can differ a lot. In some states teachers pay into social security and earn social security benefits. There is a LOT of money involved in pensions, so there are pretty good sources of analysis and information, but they tend to be a little siloed by system and state. In cases where there is no defined benefit system (or a small one) there may be a local defined contribution system like a 457b (see link above). For a good summary try teacherpensions.org.
user avatar
June 20, 2018 at 5:42 am
Though the article's focus is California pensions it is important to note the differences in the state to state differences- closed versus open retirement systems. As a Florida retired teacher, we pay into and are set up to receive Social Security, unlike the scenario in the article; however, consider too that it is stated a "years 32-37 teachers receive pension commitments virtually equivalent to their full salary". While many California teachers may not qualify for Social Security, the "closed system" benefits them substantially. Florida teachers hired before 7/1/2011 working 32-37 years earn up to a maximum of 55% of their 5 highest averaged salaries and, unless they started teaching at 25+, will have to wait before seeing any Social Security. Thirty years puts many waiting 10 years or so living on 48-55% of their average or $22-$24K a year for years BEFORE S.S. kicks in.
user avatar
Jeff Camp June 20, 2018 at 11:39 am
Thanks for this comparison with Florida. The BIG point here is that pension systems can differ a lot, and teachers don't necessarily figure it all out until they are decades into it. Teacher unions spend quite a bit of energy helping their members understand what they have. California has recently made significant changes, and this post is under review for update.
user avatar
Carol Kocivar May 28, 2018 at 10:41 am
Why More Than A Million Teachers Can't Use Social Security from All things Considered on NPR:

Read the
user avatar
Carol Kocivar May 28, 2018 at 10:42 am
user avatar
Jeff Camp - Founder April 15, 2018 at 5:24 pm
California teachers are not alone in relying on pension promises as a key part of their total compensation. For The74, Chad Aldeman writes that retirement commitments are rising part of the "total package" for teachers all over America. https://www.the74million.org/article/aldeman-teachers-have-the-nations-highest-retirement-costs-but-theyll-never-see-the-benefits/
user avatar
MaryGW April 3, 2018 at 9:55 am
Excellent explanation of a complex topic. Trying to get 30 years of middle income work to support 80 years of life is a difficult proposition without rethinking how we finance baseline life costs, like funding getting kids from birth to the job market and managing everyone's health. Esp. as we come to terms with the delta between population growth projections and reality.
user avatar
Jeff Camp - Founder July 31, 2017 at 2:20 pm
Figure 26 in this 2017 LAO report summarizes the planned changes in pension contributions that will affect school districts in California: http://www.lao.ca.gov/Publications/Report/3549#Pension_Costs
user avatar
Jeff Camp February 3, 2017 at 2:31 pm
In early 2017 the STRS board voted to lower the state's assumptions about future investment returns in the STRS fund from 7.5% to 7%. This is one of those dull decisions that matters a lot. On the plus side, getting real is a good thing. Budgeting on the basis of an assumption that the fund will kill it in the market every single year just isn't smart. It's good news that the board is moving closer to reality-based budgeting. On the minus side, OUCH. Getting real means that more money needs to be added to the STRS fund, and that will have to come from two sources: bigger deductions from teachers' paychecks and bigger set-asides from the state budget. (School districts are already digesting their share of a big increase agreed to in 2013.) Read more on EdSource: State, new teachers to pay more to shore up state teachers pension fund
user avatar
Albert Stroberg May 1, 2016 at 6:58 pm
My office examined retirement plans for all of our workers. Even in 1985 we saw the traditional Defined Benefit plan was not workable- none of us could afford it. Yet, the state legislators went ahead with this idea that the market investments would magically make everything easy & there would be no need to raise taxes or contributions. They were and are wrong. We need to get used to pay as we go rather than always hoping for manna.
user avatar
Manuel RomeroNickname June 27, 2015 at 12:09 pm
"As employers, districts previously contributed the equivalent of 8.25% of teacher salaries to STRA, but under the new law that will eventually rise to 19.1%." That is a HUGE increase!
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