How Much Do CalSTRS Retirees Really Make?

Summary:  The California State Teacher’s Retirement System (CalSTRS) is California’s 2nd largest public employee pension fund, serving roughly 2% of California’s population. At present, its unfunded liability is officially estimated at $71 billion. While much of the discussion over pension reform focuses on projected rates of investment returns, which greatly affects the required annual contributions to the fund, too often the actual amount of the average CalSTRS pension is omitted from these discussions. Even worse, the average pension amounts frequently cited for CalSTRS retirees are often misleading because they fail to take into account years of service, or the impact of pension benefit enhancements in recent years.

In this study, we analyze data from CalSTRS 2012 pension records to assess the true value of the average CalSTRS pension. We do so by factoring in years of service data to extrapolate an average “full career” amount, represented by both 30 and 43 year terms. We find that the average CalSTRS retiree can presently expect to receive a $51,500 pension for having worked a 30 year career, and a $73,817 pension for a 43 year career.

This study also analyzes 2012 pension averages broken out by the retiree’s retirement date and finds a significant disparity between the amount received by those who have retired more recently as compared to those who have retired earlier. For example, if a CalSTRS participant had retired in 2012 after working 30 years, they could expect an initial annual pension of $57,645; after 43 years, $82,625. The average 2012 pension for a CalSTRS participant who retired 20 years ago, in 1992, is much lower; $38,517 if they had worked 30 years; after 43 years, $55,207.

When discussing how much public employees receive in pension benefits, in order to make accurate comparisons and avoid misleading the public, it is vital to adjust the data to reflect averages based on full careers in public service. It is also vital to provide averages that reflect current benefit formulas, since the more generous formulas currently in effect are what inform the scale of pension liabilities in the future. This study addresses these concerns.

INTRODUCTION

The pay and benefits of public employees is a discussion of increasing relevance to taxpayers. As noted in a CPPC study published on February 1st, 2014, “How Much Do California’s State, City and County Workers Really Make?,” in California, personnel costs are estimated to consume 40% of total city budgets, 41% of the state budget for direct operations, and 52% of county budgets. In many cities and counties the percentage is much higher. And these averages don’t include personnel costs for outside contractors, nor do they include payments on debt that is directly related to personnel costs, such as pension obligation bonds.

Meanwhile, even when budgets are balanced, as may be the case this fiscal year at least for the State government, there is an overhang of debt obligations facing California’s state and local governments that are only manageable as long as interest rates remain relatively low. Another CPPC study published in April 2013 entitled “Calculating California’s Total State and Local Government Debt,” estimated California’s total state and local bond debt at $382.9 billion as of June 30, 2012. That same study reported California’s officially recognized state and local unfunded obligations for retirement health insurance and pension obligations at $265.1 billion. Using more conservative assumptions regarding pension fund performance, the study estimated these retirement obligations on the part of California’s state and local governments could increase by an additional $389.8 billion. In all, it is quite likely that California’s taxpayers currently owe over $1.0 trillion in total debt and unfunded retirement obligations incurred by state and local government, and most of that is for retirement benefits for state and local government employees.

In this environment it is important to present factual information relating to public sector compensation. With respect to retirement benefits, it is helpful to present complete and accurate aggregate data, in order for policymakers and taxpayers to determine whether or not current benefit formulas are fair and financially sustainable. This study analyzes data from CalSTRS, using nearly a quarter-million records obtained from CalSTRS for 2012. In particular, this study presents data showing, by year of retirement, what the average pension benefits were in 2012. The study then normalizes these benefits to account for full careers using two benchmarks – the public sector “full career” expectation of 30 years, and the private sector “full career” expectation of 43 years.

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METHODS AND ASSUMPTIONS TO ACQUIRE DATA

This study precisely replicates the methods used in a CPPC study released on February 14th, 2014, “How Much Do CalPERS Retirees Really Make?”  The analysis and charts developed for this study can be evaluated by downloading the following spreadsheet. Please note the file size is 23 MB.

CalSTRS-2012_Analysis_normalized-pensions-by-year-of-retirement.xlxs

The source data was acquired from the website www.TransparentCalifornia.com, an online resource produced through a joint-venture involving the California Policy Center and the Nevada Policy Research Institute. The data on the Transparent California website, in this case, was acquired directly from CalSTRS, and has not been altered. Since the focus in this study involves aggregate data, the names of individual participants have been removed from the downloadable spreadsheet that accompanies this analysis.

Because the information provided by CalSTRS included “year of retirement” and “years of service,” it is possible to normalize the information to produce “full career” equivalent pensions. It is vital to make this analysis, because no statistic representing average pensions can be evaluated apart from knowing how long most participants actually worked. It would be analogous to saying that an active worker only was paid $100 for a day’s work, without knowing how many hours they worked. Did they work ten hours and earn $10 per hour, or did they only work one hour and earn $100 per hour? Without looking at how many years participants worked to earn their pensions, we cannot even begin to have a productive discussion as to whether or these pensions are fair and appropriate or not.

From a standpoint of financial sustainability it is also vital to know how many years of service the average pensioner logged. Using the payroll analogy again, if a person only worked one hour in a day and made $100, and the employer needed someone at that post for ten hours, than the employer cost was actually $1,000 per day, whereas if that person worked a ten hour day and made $100, then the employer cost was only $100. This is precisely what is at stake when evaluating the overall cost to taxpayers of public sector pensions. For example, if the average years of service for a pensioner is only 20 years, and a private sector career is actually 40 years, then the taxpayer is essentially paying for two pensions for each position that would have been filled by one person working 40 years.

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AVERAGE LENGTH OF SERVICE AND AVERAGE PENSION – TOTAL POOL OF PARTICIPANTS

In Table 1 it can be seen that nearly a quarter-million retirees collected pension benefits through CalSTRS during 2012, and that the average pension was $43,821 during that year. Inexplicably, this average is considerably higher than the averages frequently cited by spokespersons for CalSTRS and public sector unions representing CalSTRS participants. But the average CalSTRS retiree worked for 25.53 years. It is not reasonable to suggest that someone who has only worked perhaps two-thirds the duration of a normal career should expect a retirement benefit that might be more appropriate for a full career. And it is impossible to discuss, much less determine, whether or not CalSTRS retirement benefits are appropriate, without taking into account how long a retiree has worked in order to earn their retirement benefit.

Table 1  –  Basic CalSTRS Data, 2012

20140228_CalSTRS_normalized-pensions_Table01

The next table, below, depicts how much these overall average pension amounts would increase if the retiree pool had turned in an average “years of service” of 30 years, which is a typical duration to use when considering public sector careers, as well as 43 years, which is typical for any private sector worker who hopes to receive the full Social Security benefit.

These calculations are made by dividing the average annual pension for a CalSTRS participant in 2012, $43,821, by the average years of service, 25.53. The result, $1,717, is the amount the average CalSTRS retiree accrued in annual pension benefits for each year they worked during their careers. This amount is multiplied by 30 to show what a current CalSTRS retiree could expect, on average, if they had worked 30 years; $51,500.  This amount is multiplied by 43 to show what a current CalSTRS retiree could expect, on average, if they had worked 43 years; $73,817.

Table 2  –  CalSTRS Average Pensions Assuming Full Careers

20140228_CalSTRS_normalized-pensions_Table02

Just as when considering current compensation for public employees, total compensation – direct pay plus employer paid benefits – is the only truly accurate measurement of how much they make, when considering retirement pensions for retired public employees, pensions adjusted to show what they would have been if the recipient had spent their entire career working and paying into the pension system, i.e., “full career equivalent pensions,” are the only accurate measurements of how much they are really getting in retirement. But there is another crucial variable that must be considered to complete this analysis, which is how much full career equivalent pensions are paying to CalSTRS retirees who retired in recent years.

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AVERAGE PENSION ADJUSTED FOR FULL-CAREER – SHOWN BY YEAR OF RETIREMENT

Because the data provided by CalSTRS includes not only years of service for each participant, but also the year they retired, it is possible to calculate average “full-career” pension benefits based on the year they retired. It is important to do this because pension benefits for California’s state and local government workers were steadily enhanced over the past decades, especially after 1999 when SB 400 was passed by the California state legislature. In general, pension formulas have been altered to bestow pension benefits that are approximately 50% better today than they were 20 years ago. At the same time, pension benefits are calculated on rates of pay, which themselves have increased at a rate exceeding inflation for at least the last 20 years.

Table 3 depicts the unambiguous impact of these trends. The last column to the right on the table, “Avg Pension, 43 Years Svc” shows what retirees would be really getting in pension benefits if they had worked 43 years – from age 25 through age 67 (one may substitute age 22 through age 64, or whatever, of course). As seen, the 14,247 retirees in 2012, had they worked 43 years, would have collected average annual pensions of $82,625.

In general, pensions adjusted to reflect a full career in the private sector exceeded $80,000 per year starting with those CalSTRS participants retiring in 2001. They decrease sharply for participants who retired prior to 2001. In 1999 and 2000 they were less than less than $70,000 but more than $60,000. Participants who retired between the years 1986 and 1998 collect pensions today – again, had they worked a full private sector career – greater than $50,000 and less than $60,000. Participants who retired before 1986 collect pensions today that are less than $50,000.

It is hard to find a data set that shows a greater correlation than this one: The earlier you retired, the less you’re going to get in your pension today. That is because pension formulas were enhanced for California’s state and local government workers over the past 10-20 years – especially starting around 1999. Not only were they enhanced, but they were enhanced retroactively, meaning that someone nearing retirement who had been accruing pension benefits at a rate of 2.0% per year, for example, suddenly began accruing pension benefits at a rate of 3.0% per year not only for the years remaining in their career, but for every year they worked.

To speculate as to why it was possible to retroactively enhance pension formulas through legislative action, yet it is purportedly unconstitutional and therefore impossible to merely reduce these formulas for active workers from now on, would go beyond the scope of this modest analysis.

 Table 3  –  CalSTRS Average “Full Career” Pensions By Year of Retirement

20140228_CalSTRS_normalized-pensions_Table01-bar-chart

Table 3 (Data)  –  CalSTRS Average “Full Career” Pensions By Year of Retirement

20140228_CalSTRS_normalized-pensions_Table03

It is probably necessary to reiterate as to why full-career equivalent pensions are the only accurate measurement to use when discussing whether or not today’s public sector pension benefits are appropriate or financially sustainable. The reason is simple and bears repeating:  Defenders of pensions as they are use “averages” that don’t seem terribly alarming. Notwithstanding the fact that a self-employed person in the private sector would have to earn over $100,000 per year and contribute 12.4% of their lifetime earnings in order to collect the maximum Social Security benefit of $31,704 at age 68, which is considerably less than the average CalSTRS pension of $43,821, that average CalSTRS pension is based on an average years of service of 25.53 years. Somebody who has only worked for 25 years should not have an expectation of a pension that exceeds the maximum Social Security benefit that requires 12.4% of a six-figure annual income and 43 years of work. Few, if any participants in CalSTRS are contributing more than 12.4% of their pay into their pension account. The taxpayers make up the difference.

When debating the financial sustainability of CalSTRS and the other pension funds serving California’s state and local government workers, there are many issues. How the unfunded liability is estimated is the topic of intense debate, focusing primarily on what rate-of-return these funds believe they will average over the next few decades. That rate-of-return estimate also is a primary determinant of how the “normal contribution” is calculated. There are myriad aspects to the debate over how to adequately fund public sector pensions. But missing from that debate far too frequently is an honest assessment of just how much, on average, these pensions are really worth to the recipients.

This study has presented a calculation of what CalSTRS’s average pension benefit is based on years worked as well as year of retirement. It has normalized that data to show that a retiree who worked 30 years and retired last year, on average, can expect a pension of over $57,000 per year, and if they worked 43 years and retired last year, on average, can expect a pension of over $82,000 per year.

About the Authors:

Robert Fellner is a researcher at the Nevada Policy Research Institute (NPRI) and joined the Institute in December 2013. Robert is currently working on the largest privately funded state and local government payroll and pensions records project in California history, TransparentCalifornia, a joint venture of the California Policy Center and NPRI. Robert has lived in Las Vegas since 2005 when he moved to Nevada to become a professional poker player. Robert has had a remarkably successfully poker career including two top 10 World Series of Poker finishes. Additionally, his economic analysis on the minimum wage law won first place in a 2011 essay contest hosted by the George Mason University.

Ed Ring is the executive director for the California Policy Center. 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.

3 replies
  1. F. Minook
    F. Minook says:

    This is very good analysis but there are some other factors to consider. I worked for the county of L A for thirteen years. I belonged to a union. I retired after 13 and half years. I am receiving a pension from L A County. I was offered some options when I retired. I could have cashed out or take an annuity. I chose the annuity. I was given other options at that point. I could chose from 1) life only, 2) joint and survivor 100%, 3) joint and survivor 50%, 4) period certain, or 5) Social Security option. The life option was for my life only and would have been much higher monthly. The J & S 100% would cover me for my life and my wife for her life time after. This option pays the least monthly benefit but my wife would assume the same monthly payment for her life also. The J & S 50% would pay me a higher monthly benefit but my wife would receive only half when I died. The period certain option covers payment for 60 month, 120 months, or 180 months. The payments would cover only those periods. The monthly benefits would be higher but end after the chosen period. The Social Security option works only if you retire before age 62. It increases your monthly benefit before you reach age 62 but decreases after that age. It is only for your life. I chose the J & S 100 % option. My monthly benefit is much lower than any other option but my wife would benefit after I died. I expect to live until I am about 79. My wife could live until she is 98.

    I would have to assume that the other unions are offered the same options. This fact adds to the complexity of the calculations for retirement benefits. Many of my friends chose the cash out option. They received their cash up front. Some of them were with the company for over 30 years and received a lump sum of $500,000. They can never come back and try to claim another pension unless they started to work for the company again. They would have to start over from year one.

    Reply
  2. Tough Love
    Tough Love says:

    Ed Ring,

    As I’m sure you know from past comments of mine, I’m one of your biggest supports, but just for clarification in some of your comparisons …

    (a) I believe the highest current “full” or “normal” SS retirement age is 67, not 68
    (b) SS only uses the highest 35 years of earnings in the calculation of benefits, so while working longer ‘may” result in a greater payout (due to the formula SS uses), the added years (beyond 35) do nothing to increase the SS payout.

    And FYI, if you want another very reasonable way to evaluate whether Public Sector pensions are “fair and appropriate” your should consider the approach I used in my long comment in an earlier post of yours, specifically here:

    http://unionwatch.org/how-much-does-professionalism-cost/

    Reply

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