You Earned a Ticket!

Which school do you want to support?

Lesson 3.11

How Good is a Teacher's Pension?

Teaching pays better than you think, because…

hero image

Obviously, no one gets filthy rich on a teacher's pension.

Teachers aren't lavishly paid, but each year of teaching comes with a significant promise toward a financially secure retirement. It is easy to underestimate the value of the pension system in the "big picture" of teacher compensation.

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 might.

Comparing a pension (defined benefit) to a retirement plan (defined contribution) is an apples-and-oranges problem. People considering teaching often underestimate the real value of the pension they will receive. Comparing a pension (with a defined benefit) to a retirement plan (with a defined contribution) is an apples-and-oranges problem. People considering teaching often underestimate the real value of the pension they are promised.

Teachers' pensions in most states, including California, are "defined benefit" systems. That is, when a teacher retires, he or she receives payments in a manner defined by the rules of the pension system, not by the amount he or she paid in. Very few jobs in the private sector offer a pension in this manner anymore. In the private sector, employees commit a portion of their pay into a personal retirement savings accounts such as an IRA or 401(k) account. This approach is known as a "defined contribution" model.

The difference in approach creates an apples-and-oranges problem. It is difficult to accurately compare teacher pay with private sector pay, because they work differently. In a simple comparison, teacher salaries can seem worse than they are. Private-sector workers' retirement dollars flow through paycheck deductions and build up in a way that is easy to count. They show up on a monthly statement. They accumulate in an account.

Teacher pensions, by contrast, don't accumulate. Like a life insurance contract, teacher pensions are a promise of future payments. The "payout" on this contract varies mostly on how long the beneficiary lives.

It's like Social Security, but less certain

California public school teachers do not pay Social Security taxes or earn Social Security benefits.

California public school teachers do not pay Social Security taxes or earn Social Security benefits. Instead, they participate in the California State Teachers’ Retirement System (STRS). Retirement benefits are a very important and significant element of teacher compensation.

California teachers pay into the STRS system in a way that is very similar to Social Security. Each month, a portion is withheld from their gross wages. Later, they will be entitled to payments from the system. For decades, California's STRS account benefitted from some enormous advantages and a tremendous run of good luck.

The most basic advantage has been that over the long term, California's population has grown. As California added new public school teachers to keep up with growth in enrollment, the number of teachers paying into the system grew faster than the number of retired teachers served by it. Also, like all banks and funds, STRS benefitted hugely from falling interest rates and massive, sustained growth in the value of the stock market. For decades, teachers in California were required to contribute just six percent of their wages toward their retirement system. The STRS governing board forecast that the fund would rack up big gains. For a long time they were right.

The Good Old Days

Perhaps because times were so good, teacher pension rules underwent a lot of tinkering, incorporating a lot of strange incentives.

The graph below is based on the Oakland salary schedule in 2006, a suitably representative example of the time. It expresses the total financial compensation a hypothetical teacher in Oakland received each year, including each year’s increase in promised lifetime STRS pension benefits.


The chart requires a bit of explanation. In year ten, for example, the teacher receives gross pay of about $59,000, from which 8% (about $4,700) is withheld for contribution to the California STRS system. (In the graph, this is the very small negative portion below each column.) The school district matches this contribution, plus an extra 0.25%. The plan includes a few specific anomalies: A teacher qualifies for no pension at all unless he or she works at least five years. There is a very significant pension incentive to stay for a thirtieth year. And in years 32-37 teachers receive pension commitments virtually equivalent to their full salary.

Examining a sample year for a sample teacher can help you understand how it works. For completing his or her 10th year in the system, the teacher’s defined monthly pension check upon retirement increases by about $100. You can think of this as an upgrade in the value of the teacher’s pension which will benefit him or her each month, upon retirement. This small monthly increase, granted in year ten, will add up to about $36,000 (in 2006 dollars) over the course of an average 30-year retirement. (Of course the "increase in value" shown here is an estimate based on a typical 30-year retirement. The actual value of these bumps will vary, depending on how long a teacher lives in retirement.)


In an average retirement lifetime of thirty years, historically CalSTRS was kind of a magic deal for teachers. It paid back about five or six times what teachers put in, adjusted for inflation. But pension benefit calculations are complicated, and few teachers fully understand them.

What goes up must come down. In 2008 the stock market collapse added to pressures that had been building over time. California's enrollment growth had slowed. Interest rates had reached levels so low they could no longer fall. Retired teachers were living longer than the models expected, drawing pensions for more years. California wasn't alone in allowing its projections to grow rosy.

In 2013, the financial condition of the STRS system had deteriorated to an unsustainable degree. California's legislature raised the rate of teachers' contribution to 10.25% (a rate higher than Social Security's 6.2% but less than STRS rates in other states; in Louisiana the withholding rate exceeds 20%). School districts tightened their belts to contribute more, too. Contribution rates from districts and the state were set to rise into the 2020s.

School costs, particularly the costs of salaries and pensions, are going up. So be aware: even if you see headlines in January that say the budget provides “more money” for the school system, that does not necessarily translate into more money to invest in more programs and services at your school.

Higher state and local contributions are improving the financial health of the teacher pension system, but the money isn't coming from a magic well, and it may continue to rise for a considerable period. In 2018 school districts and teachers started feeling the pinch, and county offices of education had important work to do to scrutinize the accounts and ensure that everyone faced the math.

What if teachers also earn Social Security wages?

A person who works part of a career in STRS employment and part of a career in "regular" employment, contributing to Social Security, receives retirement benefits from both systems. There's a wrinkle. As described above, the STRS system is set up to strongly favor end-of-career earnings. The Social Security system is set up in the opposite way; it is progressively indexed to favor initial 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. This combination could create unintended incentives. To prevent abuse of this progressive indexing, Social Security subtracts STRS receipts. The complexity and interaction of these systems creates barriers to entry and exit from the teaching profession.

Most criticism of STRS is similar to criticism of other defined benefit pension systems. The following video explains some of the oddities that have crept into many states' systems, making them vulnerable to issues like "spiking."

Concerns About STRS in the Long Term

California's pension system has enjoyed the benefit of a growing stock market over the long haul. But what the market gives it can also take away.

As enrollment flattened and investment returns swooned, teachers and analysts began to express concerns about whether these pensions were safe. 

O give me a pension
that I can trust /
O please don't mention
the risk of a bust /

In 2008 the Pew Center on the States raised eyebrows by estimating California’s unfunded current public liabilities at more than $60 billion, much of it from STRS. By 2013, even after two years of strong growth in fund assets, the unfunded liabilities of the STRS system alone were reckoned to be nearly $167 billion - equivalent to hundreds of thousands of dollars per teacher.

The Legislative Analyst Office (LAO), charged with providing impartial analysis to the state legislature, reported in its sober style that unfunded teacher pensions could be California's "most difficult fiscal challenge." David Crane, president of the nonpartisan advocacy organization Govern for California, compared the pension obligation to being on the wrong end of a giant zero-coupon bond. He said that the state needed to quickly begin setting aside significant funding each year to pay down this debt, or the interest would swell into an unfunded "$600 billion dollar sinkhole." How much funding is "significant"? The LAO analysis suggested that the problem could be stabilized with a steady investment of $4.6 billion per year.

Source: LAO, 2016 Source: LAO, 2016

The legislature responded to these concerns in June 2014. Over a period of seven years, AB1469 began phasing in changes to the amounts that teachers, school districts (which employ teachers) and the state each pay into the STRS system. The bulk of the changes fall on school districts. As employers, districts previously contributed the equivalent of 8.25% of teacher salaries to STRS, but under the new law that will eventually rise to 19.1%.

Could be Worse, but...

All pension systems are complex, and teacher pension systems vary enormously from state to state. Overall, comparisons with other states tend to show California's system as fairer and more stable than most. Because of the difficulty in comparing the personal value of a defined benefit system with that of a defined contribution system, teachers and prospective teachers in California tend to underestimate the substantial value of the pension benefits they are earning. In the long run, California teacher pay is better than it looks on a pay stub.

But it's important not to be confused. Yes, teachers in California have better pensions and benefits than employees in most other lines of work -- but as summarized in Lesson 3.8, these benefits fully don't make up for low pay.

This post concludes the "Teachers" section 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.

Updated Jan 2018


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

Answer the question correctly and earn a ticket.
Learn More

Questions & Comments

To comment or reply, please sign in .

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.
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:
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-Romero 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!
©2003-2018 Jeff Camp
Design by SimpleSend

Sharing is caring!

Password Reset

Change your mind? Sign In.

Search all lesson and blog content here.

Sign In

Not a member? Join now.

or via email

Share via Email

Join Ed100

Already Joined Ed100? Sign In.

or via email