CalSTRS estimates $22.7 billion savings from pension reform
September 6, 2012 | By John Fensterwald | 8 Comments
The pension reforms that the Legislature passed before skipping town on Friday will save the California State Teachers’ Retirement System $22.7 billion over 30 years, according to a preliminary analysis that CalSTRS released on Wednesday. But CalSTRS administrators cautioned that most of the savings won’t be achieved for decades, because reduced pension benefits will affect only employees hired after Jan. 1, 2013. And the savings won’t reduce the Legislature’s need to deal with the current $65 billion deficit, caused when returns on investments tanked in 2008 and failed to fully recover.
“We have been working for some time to raise awareness of our funding shortfall, the cost of waiting to address it, and the ultimate risk failing to do so presents to the state General Fund,” said CalSTRS Chief Executive Officer Jack Ehnes in a press release.
The reforms passed in AB 340 will apply to most public employees and involve raising the retirement age, capping benefits, and ending questionable practices that increased the payout to various members. The biggest changes to CalSTRS members include:
- Raising the retirement age from 60 to 62 to receive a full benefit equal to 2 percent of retirement pay multiplied by the number of years worked (50 percent of final pay for working 25 years, for example);
- Setting the retirement pay based on the average of the three years instead of the single highest year;
- Capping the income for determining pensions at $132,210. CalSTRS estimated that change would substantially affect 4,500 members who currently earn more than that amount.
AB 340 also requires that employees split the normal costs of their pension. Teachers and administrators currently pay 8 percent of their pay into CalSTRS; that represents only 44 percent of the 18.51 percent of payroll needed to operate the system, with school districts paying 8.01 percent and the state paying 2.5 percent out of the General Fund. In coming decades, as the benefits provided decrease because of the latest reforms, the normal operating costs of CalSTRS will decline to 15.9 percent, resulting in substantial savings to the state.
Here is a summary of the impacts of legislation on CalSTRS members.