Comparing CalSTRS Pensions to Social Security Retirement Benefits

Summary:  This study compares Social Security retirement benefits to CalSTRS pension benefits and finds a significant disparity between the plans, despite the employee contributions being relatively similar.

For example, the average CalSTRS participant retires at age 62, which is the current earliest age one may collect Social Security retirement benefits. At age 62, the average CalSTRS retiree collects 56% of their final salary in the form of a pension, whereas, depending on their income, the average Social Security recipient collects between 29% and 36% of their final salary in the form of a retirement benefit. At age 65, the oldest age necessary to collect the full CalSTRS benefit, a CalSTRS retiree with 35 years experience will collect a retirement benefit equal to 84% of their final salary. At age 65 a Social Security recipient will collect a retirement benefit between 30% and 35% of their final salary.

The study then examined how much more a CalSTRS participant might have accumulated based on having 8.0% of their paycheck withheld vs. only 6.2% for a Social Security participant. For a CalSTRS paticipant retiring at age 65 with a final income of $80,000, the study estimated the value of this extra 1.8% in annual contributions to equal $155,814 after 35 years of withholding. This is equal to 3.6 years of the difference in the amount of a typical annual CalSTRS pension and a typical Social Security annual retirement benefit, i.e., it does not come close to closing the gap between the typical Social Security benefit vs the typical CalSTRS benefit. A more in-depth analysis of contribution comparisions between CalSTRS and Social Security will be the topic of a subsequent study.

In general, the study calculated the average annual CalSTRS pension to exceed the average annual Social Security benefit by between 1.5 and 1.9 times for those retiring at age 62, and by between 2.4 and 2.8 times for those retiring at age 65.

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INTRODUCTION

“California’s educators do not participate in Social Security, retire on average around age 62, and earn a retirement income that replaces only about 56 percent of their salary.
CalSTRS Statement on Proposed Pension Reform Act of 2014 Ballot Measure, October 17, 2013

A frequent objection to public sector pension reforms is that pension benefits are received in place of Social Security. While many public employees do earn Social Security benefits along with pensions, in the case of public school teachers they do not. So how does a pension from the California Teachers Retirement System (CalSTRS) compare to a Social Security benefit?

There are various ways to make valid comparisons between a CalSTRS pension and a Social Security retirement benefit, and this article will explore some of them. In order to make these comparisons, we will rely on statements from CalSTRS or information available on their website, along with information available online from the Social Security Administration. All source data will be linked to within the text. For each of the cases to follow, we will summarize the baseline assumptions, then present the comparisons.

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(1)  How much will a person retiring at age 62, with a final income of of $80,000, receive via a CalSTRS pension vs. a Social Security retirement benefit?

A 62 year old CalSTRS retiree, based on the average presented in the above-referenced October 2013 press release, will earn an annual pension of $44,800.

A 62 year old private sector retiree working through 2013 with a final income of $80,000 will receive a Social Security retirement benefit of $23, 544 per year. This is based on inputting into the Social Security Administration’s online “Quick Calculator” a birth date o f 1-1-1952, a benefit start date of 2-1-2014, and a final annual pay of $80,000 in 2013.

As can be seen, in this first, admittedly simplistic analysis, the average CalSTRS retiree will collect a pension 90% greater than a Social Security recipient fitting the same profile, nearly twice as much. Put another way, in this example the CalSTRS particpant receives a pension equivalent to 56% of their final $80,000 salary, and the Social Security participant receives a pension equivalent to 29% of their final $80,000 salary.

Social Security, unlike pensions, however, has the characteristic of being progressive, in the sense that lower income participants will collect a greater percentage of their earnings in the form of a Social Security benefit than higher income participants. Since information on the average teacher salary earned by 62 year old retirees is not readily available, here are the same comparisons made with lower final annual earnings:

Case 1:  CalSTRS Pension vs. Social Security
Retirement Age 62, Various Final Year Earnings

20140228_SocSec_vs_CalSTRS_Case1As can be seen from the above chart, there is a considerable improvement on the amount a Social Security beneficiary will earn at lower levels of income. But even at a $40,000 annual salary, which it is reasonable to assume virtually all veteran CalSTRS participants will collect if they are still working into their early sixties, the Social Security benefit is only 36% of final salary, whereas the CalSTRS pension remains at 56% of final salary. Since CalSTRS formulas are applied regardless of income levels, it is accurate to apply this assumption to make this comparison.

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(2) CalSTRS benefits for employees hired after January 1st 2013 have had their benefit formulas reduced. How does this affect the comparison between a CalSTRS retiree and a Social Security retiree?

To answer this question it is necessary to make some assumptions regarding length of service, since the averages used by CalSTRS spokespersons are calculated based on existing retirees. From the “Retirement Benefits” section of their website, CalSTRS retirement benefits are calculated according to the following formula (readers may click on each variable for more detailed information from CalSTRS):

 Service Credit x Age Factor x Final Compensation = Retirement Benefit

Here’s how this works: “Service Credit” refers to years of full time employment (there are ways employees can increase their service credit, such as through converting unused sick time into additional service credits, but we will set that aside). The “Age Factor” is a multiplier which increases the older a beneficiary is when they retire, and the “Final Compensation” is how much they earned in their final year of full-time work. In some cases final compensation is calculated using the average of salary earned during the final three years worked.

In practice, this formula would work as follows: If someone worked 30 years, their service credit is 30. If they are 65 years old, their age factor is determined according to a table; for a 65 year old under the new benefit formula, the age factor is 2.4%. So if their final salary was $80,000, their initial annual pension would be 30 (service credit) x 2.4% (age factor) x $80,000 (final salary) =  $57,600.

Since new employees hired after January 1st 2013 are the only ones affected by the recent reductions to benefit formulas, they won’t have any significant impact on pension averages for decades. But to ensure this analysis avoids any overstatement, all comparisons used will be based on the new formulas, the so-called “2% at 62” employee pool – all of whom are new hires. Here is the statement on the benefit changes from CalSTRS, found on the first page of their 2013 Member Handbook:

“Of special note, the California Public Employees’ Pension Reform Act of 2013 made significant changes to the benefits for members first hired on or after January 1, 2013, to perform CalSTRS creditable activities, and other changes that affect both new and existing members. As a result, CalSTRS now has two benefit structures:

• Members first hired on or before December 31, 2012, are under CalSTRS 2% at 60.

• Members first hired on or after January 1, 2013, are under CalSTRS 2% at 62.”

Under CalSTRS’s new pension benefit formulas, which are marginally less generous than their old pension benefit formulas, if you retire at age 65, you are entitled to an “Age Factor” of 2.4% (ref. column 4 in the table on CalSTRS “Age Factor” information page).

Immediately one may see that earning a pension equivalent to the amount CalSTRS represents as “average,” 56% of final salary, would require a participant to work for 23.3 years, since 23.3 x 2.5% = 56%. Referring to the table depicting Case 1, above, this means that to earn a pension that exceeds the Social Security benefit by the amounts pertaining to various levels of final salary between $40,000 and $80,000 – all quite significant – one would only have to work 23 years.

For the sake of a fair comparison, however, it is necessary to examine the Social Security benefit at age 65, since that is how old a CalSTRS participant now must be before they can earn the maximum multiplier (or “Age Factor”) or 2.4%. This, in turn, requires one to speculate as to how many years a Social Security recipient would have to work in order to get the amount calculated by the “Quick Calculator” benefit estimator provided by the Social Security Administration.

Fortunately, in the “Frequently Asked Questions” section of the Social Security website, this can be found:

“8. How does the Quick Calculator estimate my past covered earnings? Answer: The calculator bases your estimated past earnings on the latest earnings figure you provide, the national average wage indexing series, and a relative growth factor that is initially set to 2 percent.”

Digging deeper, it can be seen from the Social Security website’s page “Benefit Calculation Examples For Workers Retiring In 2014,” that in these “Quick Calculator” estimates, as they put it, “We use the highest 35 years of indexed earnings in a benefit computation.” This is helpful for validating the assumptions necessary for a proper comparison at age 65. The Social Security estimates assume at least 35 years of work.

Here then, are the benefits one may expect from the revised, reformed and diminished CalSTRS benefit formulas, compared to the current Social Security retirement benefit formulas, for a 65 year old retiree who has worked for 35 years. This shows the same final annual income variants as case 1, ranging from $40,000 to $80,000.

Case 2:  CalSTRS Pension vs. Social Security
Retirement Age 65, Various Final Year Earnings

20140228_SocSec_vs_CalSTRS_Case2 As is readily apparent on the above table, working for 35 years creates a major improvement in the pension benefits enjoyed by a CalSTRS participant; instead of collecting the average 56% of final salary at an average age of 62, by age 65 – if they have worked 35 years – they will collect a pension equivalent to 84% of their final salary. For a Social Security participant, waiting an extra three years to retire scarcely makes a difference. Depending on their income, they will collect at retirement benefit equivalent to somewhere between 30% and 35% of their final year of earnings.

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(3) But CalSTRS participants contribute 8.0% of their salary into the pension fund, and Social Security participants only contribute 6.2% of their salary into the Social Security fund. What’s that worth?

Before answering this question, it should be intuitively obvious that contributing 1.8% more into a fund will not fund a lifetime retirement annuity that is between 1.5 and 2.8 times greater than if one had retained the 1.8% asZ take-home pay.

The table below shows in detail exactly how much more money someone might be able to save over the course of a 35 year career by putting 1.8% of their paycheck into a fund that yielded 7.5% annual interest.

Case 3:  CalSTRS Pension vs. Social Security
Additional Savings Possible By Contributing 1.8% More Per Year

20140228_SocSec_vs_CalSTRS_Case3-REVISED-a

As shown above, after 35 years, putting an extra 1.8% of earnings per year into an investment fund will only increase the total savings by $155,814 (contributions of $37,438 plus investment earnings of $118,376). At age 65, as shown in Case 2, a CalSTRS participant who worked 35 years and retired at a final salary of $80,000 (also used in this case) will earn an initial annual pension of $67,200. A Social Security participant, using identical assumptions, can expect an initial annual retirement benefit of $23,940, a difference of $43,260 per year. This means the extra withholding made by the CalSTRS participant earns an extra amount, $155,814, that is used up in 3.6 years.

According to the online Life Expectancy Calculator provided by the Social Security Administration, in 2014 a 65 year old American may expect to live, on average, for another 20 years. This means that contributing another 1.8% on the part of CalSTRS participants compared to Social Security participants will still leave, on average, a gap of $709,386 in lower benefits earned by the Social Security recipient (16.4 x $43,260).

Because much has been made of the extra amount CalSTRS participants have withheld, it is important to emphasize that every assumption used in this analysis is conservative. The “growth factor on past earnings” is only 2%, matching the one used by the Social Security Administration in their estimates. This low percentage is unlikely to accurately reflect earnings growth, especially in the public sector, where in general over the past three decades earnings growth has kept pace with inflation. Using a lower than representative growth factor of 2.0%, working backwards from the present into the past, results in early career pay estimates that are higher than what probably was the case. This causes the early career contributions to be overstated, causing compound interest to accrue on larger amounts, resulting in a larger ending fund balance than would have actually been achieved.

Similarly, this example uses a 7.5% earnings estimate throughout. While CalSTRS claims to have achieved this result historically, it is not clear they will be able to achieve it in the future, for a variety of macroeconomic reasons that are the topic of ongoing debate.

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About the Author:

Ed Ring is the executive director for the California Policy Center where he oversees execution of the Center’s strategic plan. He is also the editor of ProsperityCalifornia.org and UnionWatch.org. Previously as a consultant and full-time employee primarily for start-up companies in the Silicon Valley, Ring has done financial accounting for over 20 years, and brings this expertise to his analysis and commentary on issues of public sector finance. Ring has an MBA in Finance from the University of Southern California, and a BA in Political Science from UC Davis.

 

 

19 replies
  1. YEEEHAAA says:

    This article seems kind of irrelevant – SS earns pretty much zip, while CalSTRS has earned 8% or so over the last 30 years. That would be the difference in pensions. Don’t get me wrong, I appreciate you fanning the flame of jealousy that those who don’t understand the whole pension process would surely fall for. Funny thing, during the Shrub years, there was a proposal to place all the SS dollars into the stock market ‘because it would earn a much higher rate and virtually every SS recipient would retire a millionaire’. Funny thing, isn’t it?

  2. A Former Native Californian says:

    Social earns “zip” because it is a direct transfer of wealth from the current workers to the retired workers. There is no “fund” that is invested that grows through investment returns. While for many years, Social Security has run a surplus of receipts over payouts, those surpluses are not invested in a productive investment, but rather it converted into a special treasury certificate (that is a Federal “T-Bill”) and Congress simply spends the money. All of it. So, in reality, there is a “lock box” with an I.O.U. from Congress. (This is actually either a bad joke or an outright fraud on the taxpayers.) As is recently the case, the retiring baby-boom generation has caused Social Security’s outflow to exceed it’s receipts. Thus Congress, will now have to authorize even more borrowing to pay the shortage.

    In looking at the article, it mentioned that workers pay in 6.4% of their salary to Social Security — but the employer also matches that amount (another 6.4%) which is considered part of the “salary cost” of the employee but it hidden so the employee only sees an understated amount paid as the Social Security tax. This difference makes Social Security appear to be an even worse deal than it already is.

    If there were no Social Security tax, it is uncertain if an employer would be able to withhold those “hidden” funds if competing for good quality employees — since the “price” the employer pays for employees includes all add-ons and benefits as part of the compensation amount. (So the “going wage” appears to an employee for a job to be (say) $20 per hour. But the cost to the employer is actually (typically) $30 per hour when cost of all benefits is added in. As far as the employer is concerned, the employee is being compensated at the higher rate, so if some or all benefits (including health insurance as well as retirement and other payroll costs) were no longer required, it is more likely that to retain the best help, those payments would go directly to the employee as the employer would be competing with other employers for quality employees.

    It’s also unclear exactly how much the state and local governments (as CalPers employers) pay in to the retirement fund.

  3. YEEEHAAA says:

    Agree with you’re entire post.

    As far as what the government pays into CalPERS – it is easy to find for most any employee. That said, there are different percentages based on the safety/non-safety classes, and sub classes therein.

  4. Tough Love says:

    Ed, for what it’s worth, in your Case 3, I believe your 7.5% return (assuming the source is from a balance equity/bond portfolio) is too high, especially if is intended to be forward-looking.

    Your $138,502 accumulation @ 7.5% would be $100,655 using a more realistic 6%.

  5. Joe says:

    first, the employer also contributes 6.4% to FICA and that is why many public agencies do not have FICA because they do not want to contribute. so in reality, FICA is costing the private sector worker 12.8%, far higher than the public worker is contributing. and if calstrs is doing so well and earning this fabulous return on investment, then why do they have such a huge unfunded liability and why do they need to keep asking the taxpayers for more money? I say let the public employee have any pension they can negotiate, but pay that pension solely from public employee contributions and growth in the pension fund. see how long that would last.

  6. Richard Rider says:

    While this is an EXCELLENT article, I despair over the future of social security. Remember, social security is a “social contract.” Which is not really a contract at all.

    The terms of Social Security can be changed at any time by Congress and the President — as happened with the age of SS retirement, or the taxability of social security payouts. The courts have no standing to enforce what people THINK their benefits are, or should be.

    But for you younger folks (under 45 or so) planning to live a productive life, don’t despair — while you’ll likely get little or nothing OUT of SS (especially adjusted for inflation), at least you get to pay INTO social security “insurance” for 40+ years!

  7. Tough Love says:

    True, but CERTAINLY part of that Plan’s success was simply very lucky timing, as it began at the beginning of the biggest & longest running equity bull market in American history. If it started in say 2000, the story would be a LOT different.

  8. Richard Rider says:

    Tough Love — you are correct — it was a good time to invest — the Dow was just approaching 1,000 when the plan started in 1981. But remember that it was NOT a lump sum investment — it started with zero and invested the annual contributions over time. The pot of investment money was quite small the first few years, with each subsequent annual investment having less “bang for the buck” in stock buying power.

    Similarly, SS started in January, 1937, a GREAT time to start investing. The DJIA was about 140. Yet its return is abysmal for most current contributors trapped in this system (though a GREAT deal for the first two to three generations — just like any Ponzi scheme).
    http://stockcharts.com/freecharts/historical/djia1900.html

    More important, remember that SS is a SOCIAL contract, which is really no contract at all. DC can change the plan at any time. It’s happened time after time — notably the retirement age and the taxability of the payouts. I expect SS to eventually become a “needs based” plan — you make too much, you forfeit your “old age insurance” payouts. It’s unsustainable otherwise.

  9. Tough Love says:

    Richard, I’m a Math Guy ….. even with ZERO changes in the SS benefit or FICA tax structure, SS could pay 75% of current promised benefits (from incoming payroll tax receipts) indefinitely.

    That said, I wouldn’t be surprised if modest “needs based” elements are introduced to lower possible reductions on those most in need of this income source.

    The BIG BIG BIG problem is Medicare, not SS.

  10. Richard Rider says:

    Tough Love — You might want to reconsider the “math.” The life expectancy tables used to project SS payouts understate the FUTURE lifespans of retirees. Plus there’s that inflation thingy to deal with — it’s not likely you cranked that factor into the equation. Nor did you consider the ability for the U.S. government to pay off the SS fund — which consists exclusively of U.S. debt obligations — at least without further inflating the currency. An unknown but troubling factor is the future vigor of our economy — both the number of people working and the amount they make. Labor participation rates continue to drop.

    That being said, feel free to post a URL to the math you are referencing. I kind’a like numbers too.

    And BTW, you ARE right about the Medicare fiasco. It will hit much sooner.

  11. Anon Enigma says:

    FICA is 7.65%, of which Social Security is 6.2%, not 6.4%. Amazing that this very basic fact is wrong in the analysis.

    Therefore, the employer plus employee contribution total for Social Security is 12.4%.

    For CalSTRS, before the recent reform, the employer plus employee contribution total has been 16.25% plus perhaps another 3% from the state.

    There’s the difference.

    After the contribution increases, the total for CalSTRS will be 29.35% plus 6% from the state.

  12. Linda says:

    IRS website shows employee contribute for SS is 6.2 not 6.4. 6.2+6.2(employers contribution EC)=12.4% Calstrs 8+8.25(EC)+2(state contribution)=18.25%. That’s a 5.85% difference in contribution not 1.6% the author state. Based on an average salary of $52K over 35 years @7.5% annual return the additional 1.6% would yield approximately $137K. Now use the actual additional contribution rate of 5.85% the yield after 35 years is approximately $503K. That is an 11+ year difference if the funds never earn another penny. Interestingly the author only increased the SS by$400.00 p/yr for 65 vs 62. I’m pretty sure waiting till 65 gives you more than $400 p/yr.
    Scenario 1: Private Sector Employee (PSE) draws $24K and when his spouse reaches retirement age he/she will receive (50%) or $12k if they have not earned their own SS or theirs is less. That’s 150% of the PSE SS. Calstrs employee (CE) $67k spouse gets 0, CE chooses 50% option continuing benefits for spouse CE wage is reduced by 7.5% to $62K.
    PSE + Spouse Total Social Security = $36,000
    CE+ Spouse Total Calstrs = $62,000
    Difference = $26,000 $503k/26k = 19 year difference

    Scenario 2: PSE has an employer sponsored pension or 401K with employer contributions. PSE receives full social security benefits, Calstrs employee social security benefit reduced by 30%.
    I would be willing to bet PSE making $80,000 are also offered some type of employer sponsored pension, 401K with employer matched funds, profit sharing or stock options. Come on guys how can we take you seriously when you only present part of the facts. BTW folks with the pension reform act PERS employees will now pay both Pers & SS. That is 12.2% employee/12.2% employer. Calstrs will eventually be up to about 27% between both. Are you PSE’s willing to take 12-35% of your salary in pension contributions?

  13. Ed Ring says:

    Anon Enigma – thank you for your comment. You have indeed caught an embarrassing error, one that has now been corrected, with the “Case 3” table revised, along with the related figures cited in the text. The difference in the results, however, based on using the correct 6.2% withholding amount vs. the incorrect 6.4%, is immaterial. And it is important to again emphasize how conservative the assumptions were in order to nonetheless reveal a dramatic disparity. If you invested 1.8% (the difference between a CalSTRS participant’s withholding and a Social Security participant’s withholding) in a fund yielding 7.5% per year, after 35 years you would have amassed $155,814. The difference, per year, between the amount a CalSTRS participant can expect in their annual pension and how much a Social Security participant can expect – assuming exactly the same annual earnings and years worked – is $43,260. Since the greater amount the CalSTRS participant had withheld only equates to a larger nest egg upon retirement of $155,814, only 3.6 years of greater retirement income is covered. For the other 16.4 years a retiree under these assumptions might expect to live, the dramatically greater annual retirement income under CalSTRS is completely unearned when compared to what a Social Security participant had to contribute.

    As for Linda’s subsequent comment, she makes several pertinent observations – the point regarding using the correct 6.2% withholding percentage has been addressed. She then questions the figures used in “Case 2,” the 2nd table. Please go to the Social Security calculator and verify these figures for yourself, here’s the link: http://www.socialsecurity.gov/OACT/ProgData/retirebenefit1.html

    Linda then points out, correctly, that there is an employer contribution, and when you add all that up – correctly stated the difference would be 3.6% – the earnings on this increased amount of investment is greater than the amount the author cites. Sure, but this point relies some huge assumptions. (1) She is ignoring the fact that the CalSTRS (and state) contributions are more than the employee’s contribution. The Social Security contribution is 50% employee and 50% employer. (2) She is ignoring the reality of self employed people who pay 100% of the Social Security contribution. So in terms of actual contributions that the worker themselves have to pay, in that case, you are looking at a Social Security participant who is self-employed paying 12.4% into their retirement fund, whereas the CalSTRS participant pays 8.0% into CalSTRS. That is, they pay 50% more towards their retirement, in exchange for a retirement benefit that pays less than half as much money per year. For those millions of Americans who are self employed, making that point is more than mere academic badinage.

    Finally, Linda makes a huge, huge, huge assumption regarding employer contributions to 401K funds, profit sharing and stock options. The vast majority of American workers get none of those benefits. They are typically restricted to the minority of workers who are employed by very large corporations. And even in those cases, 401K employer matching is usually only 50% of what the worker elects to withhold, and never more than 100% of the worker’s withholding. As for profit sharing and stock options, with rare exceptions, only a small percentage of private sector workers ever benefit from them. It is fine to aspire to live in a society where everyone can enjoy the level of retirement security that taxpayers guarantee for government workers, but the reality is this: It is economically impossible to do that. Whether or not it is therefore appropriate for government workers to have this security, when virtually nobody else does, is a moral judgement we’ll all have to make on our own.

  14. Linda says:

    I am not sure how you can say I ignored the employer and state contribution when it was me not you that mention it. I am not sure how you arrived at 3.6. Last time I checked (8+8.25+2) – 12.4 equaled 5.85% which was the number I used in the above example.

    I too went to Social Security website and although my income is way below $80K even my paltry SS increased by more than $100 per month at 65 not the $400 per year you stated. You also ignored the SS reduction issues and spousal benefits. I would like to see legislation that reduces SS for everyone that receives income from an employer paid pension or matched 401K funds. Please let me know if you are willing to endorse that legislation.

    Your original article didn’t address self employment, but now that’s an argument? Neither did you mention the additional tax write offs self employed people get. How many employees can write off their car, cell phone etc against their income? Yes, I know exactly what I am talking about, I own my own business and have to pay the entire the self employment tax as well some other taxes and yes it hurts. On the other hand no one but me establishes my income and yes some years are leaner than others.

    Regarding the private sector retirements possibilities I beg to differ with your opinion. Your article uses a single wage earner of $80,000. The average HOUSEHOLD income in CA for 2013 was approximately $60,000 http://www.deptofnumbers.com/income/california/. In my perhaps limited experience individuals making $80,000 almost always have some type of optional pension plan some better than others, but I guess friends may lie about the benefits they get. Whether a 401K is 25%, 50% or 100% matched that is 100% more then a public sector employee is matched. Since you seem to think public sector jobs are so much better I am kind of surprised you haven’t applied.

    All I am asking is that all the facts are presented and not slanted in one direction.

  15. michael peachey says:

    Interesting article, I’ve always wondered why the CAL-STRS provided such a better pension than my Social Security Benefit. At 58 now, I’ve been contributing to SSA as an employer for over 30 years. My wife has contributed to both, but retired from STRS at 55 after 19 years with a $2450/ month benefit. I find it odd that SSA by the time I will start collecting my benefits after 45 years of contributing into the system my benefit is estimated to be $1750/month. It seems obvious that our government continues to mismanage the money we entrust.

  16. Belinda Mayfield says:

    This is faulty reasoning because you are comparing apples and oranges. CalSTRS pension is for professional teachers. Teachers in CA have approximately 6 years of college, about 2 years postgraduate (after the BA). The WAGE for teachers is much lower than other comparable professional trades. Because teacher wage is considerably less, the annual earned retirement will also be less. In other words, the reason teachers “agree” to low wages is directly related to this other offset (retirement). In addition, your example listed below is faulty. It would be an anomaly for any teacher to have a final income of $80,000. In order for your research to be accurate, you’d also need to compile CA salary schedules for CA school districts. Had your research included this, you would find a teacher working a 30-year career would top out their pay at about 60,000 to 65,000, on average. Since most teachers do not get to the top of the pay scale, nor work a 30 year career, the top 65,000 final income would indicate an average of the MOST a teacher would receive as a final income. Teachers who work less than 30 years will be calculating the average of the top 3 pay years. This would lower the final income. Therefore, while another comparable profession (i.e, one with 5-6 years of college, with a professional degree) may easily have a final income of 80,000 (and most likely more) to calculate a Social Security pension, the final income for a teacher will be considerably lower. Again, apples to oranges. Of course, teachers are aware of the low-paying profession and (so far) we still find many wonderful teachers for our children. The overarching reason we can still recruit great teachers is because CalSTRS, the teachers’ retirement system, serves as an offset for the low-paying profession. In the end, therefore, to equal the playing field, you would need to increase teacher pay before your pension comparison could be considered valid.

    “A 62 year old CalSTRS retiree, based on the average presented in the above-referenced October 2013 press release, will earn an annual pension of $44,800.
    A 62 year old private sector retiree working through 2013 with a final income of $80,000 will receive a Social Security retirement benefit of $23, 544 per year.”

  17. Jimbo says:

    Ed,
    This article has so many errors and false assumptions it is hard to believe you have not actually removed it out of embarrassment. Linda and Anon both tried to set you on the right path and you somehow ignored their obviously significant facts.
    http://www.calstrs.com/sites/main/files/file-attachments/calstrs_2014_funding_plan.pdf
    Here are some other contrary points which were not stated explicitly.

    1) Both the Social Security Benefit and CALSTRS pension payments are based off of some average of your salary. For simplicity, if both a private sector employee and a CALSTRS employee make $100,000, then the true total compensation for the PSE will be 106,200 (adding back the 6.2% employer contribution) compared to the $111,250 (adding back the 8.25% + 3% state). By 2020, with a 10.85% contribution from employers and 6.328% the true compensation will be $117,178. So comparing the SS benefit of someone earning “the same amount” is really comparing a lower compensated employee vs. a higher compensated CALSTRS employee. Not a reasonable comparison.
    2) The flip side of that above argument is that if you lower the actual earned wage through reductions in salary that go into pension payments, you need to raise the payout to compensate for that lower wage. To properly compare, you need to raise the comparison wage of the private SS beneficiary to anywhere between 5.0% and 11%.
    3) The CALSTRS benefit’s COLA is limited to a maximum 2% inflation factor, though just like SS, that factor can be reduced based on the CPI. SS has no such cap, so while both can go lower, CALSTRS payouts can be outpaced by SS payouts in years of high inflation, making the SS COLA benefit better.
    You might argue that these contributions are marginal. However when combined with the significantly higher funding amounts of employer and state contributions which would otherwise go into salary, your “analysis” is seriously flawed. To say you have been conservative in your assumptions is totally false.

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