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Calstrs Underfunded By $42.6 Billion

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Hello, AP.

 

My suggestion on this topic is simply a solution to the long term funding problem. The factor was increased to 2.4 back in 1997 or so by then Gov Davis. As we all recall, that was a time when the market was gaining seemingly by the minute.

 

The question now becomes whether we can always afford the 2.4 factor indefinitely. It appears not. That 2.4 was raised during a bubble. Was that wise? I celebrated at the time along with all other teachers as I looked at having a larger pension. Now, however, we look at a massive shortfall and what will the next 40 years look like? Or 50 years? Or 60 years? Does STRS need to increase their withholding to 20% or 25% or 28%? What will happen? Or does the govt. need to kick in more? I suggested a solution for the long run.

 

To answer your question, no, by itself, it is not excessive. But taken in the context of a massive shortfall and multiplied by tens of thousands of other retirees who, over a 35 year career, had the option to save, it seems problematic. I agree that stinko options are really no options at all.

 

Someone earlier posted that there is no discussion on this until the current 403b/401k plans are reformed. I agree and said that in an earlier post. WE MUST have some reform of those so ALL of us, any employee in the US, have good options from which to choose. I don't know why anyone would hammer me for saying that.

 

In an ideal situation, this $36,000 pensioner could receive perhaps $600 and then draw from his/her $2M account that he/she saved in Vanguard over 35 years.

 

My suggested solution to the shortfall is only for those recently entering the profession. The current folks and those close, of course, cannot have that change.

 

My concern is for the long term solvency of the system just as with SS. I mentioned the CALPers situation simply as another example of a system that also must be reformed if it is to maintain long term solvency.

Some angrily and immediately jumped to the erroneous conclusion that I said the folks you mention above were teachers. CALPers and CALSTRS are different systems and different employees. I say that both need reforming, along with SS.

 

In one post, Steve had asked what I am doing in the reform movement. I mentioned some things I am doing in my district. Hopefully others are doing the same in theirs. I have saluted Steve in his efforts in LAUSD, and I hope he and others continue his good fight for quality options.

 

This is the first time I have participated to such an extent on this site in a discussion because of the looming fiscal disaster that seems to be coming in our state over STRS and CALPers as well as SS at the national level. Hence, my posting.

 

Again, WE all need to assist to make sure all employees have quality options. One possible way to do that is to eliminate all 403b/457s/401ks and make only IRAs available to all employees in the US which then enable a person to invest in basically anything for their future retirement needs. The limits on this should be around $30,000.

 

Yes, reform these plans so all have quality options and yes back the govt. out while the future retirees save more.

 

Edy

 

 

Edy:

 

Would you care to share your calulation of how the average CA teacher will be able to accumulate a $2M

rertirement fund over 35 years at 8% return?

 

Taking into account that the average teacher's salary is about 65k, how much would have to contributed during each of the 35 years to reach $2M?

 

And isnt an 8% return until retirement a little aggressive taking in account that investors should be switching to more conservative investments such as bonds beginning 10 years or so before retirement which will lower the investment return below 8% to say 6 or 5%.

 

If the teachers contributions will be made to a 403b or some other individual account how will the liabilities for all of the benefits accrued for active employees under STRS be paid taking into account that the current contribution formula for STRS by payroll 8% by employees, 8.25% by the SDs and 2% by the state?

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With two major market drops in ten years, where will STRS be with the next one, two, etc? Will the issue be deeper than it currently is? I am afraid this might be the biggest financial crisis facing teachers going forward. If options stink for so many and the burden is too stiff with increasing retirees and life spans, what will be the outcome???? If we have market drops of this magnitude every ten years, what will STRS do, or SS, or CALPers? Hence, my comment that this is an important discussion point.

I suppose other states may be facing the same type situation for employee DB plans.

 

Edy

 

I absolutely agree that this is an important discussion topic. I also think that the focus should be on the l o n g term, and not the short term. Yes, we have had two huge market declines in a decade. Yes, STRS assets have taken a hit. But as I said before, let's have some perspective. Markets also rise. I know that's hard to believe since we got hammered so badly this past decade, but the next bull market (whenever that is) will improve the sustainability of STRS.

 

Now, will it be enough? I don't know, so I am certainly open to other reforms, e.g., higher employee contributions. But a 1% retirement factor? Nope, I won't go along with that. Better investments choices? Of course. Education of teachers about the need to save more for their own retirements? Absolutely. Getting rid of 4xx retirement plans in favor of an enhanced IRA available to all working people? Yep.

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If the teachers contributions will be made to a 403b or some other individual account how will the liabilities for all of the benefits accrued for active employees under STRS be paid taking into account that the current contribution formula for STRS by payroll 8% by employees, 8.25% by the SDs and 2% by the state?

 

That is a great point, Intruder. In other words, if we go to the 1% system for new teachers advocated by Edy, how on earth will STRS have the funds to pay retirement benefits for the "old" teachers -- those currently those retired, and those who got in under the 1% system?

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Hello. The calculation of $2M is an illustration, of course. Based on 35 years at 8% and contributing $14,000 per year, the end would be $1.9M+ according to a googled calculator. Of course the market is not constant and some will not contribute that amount. Some perhaps more if they knew they were to receive little in a pension. Presumably, a person would/should increase the amount contributed each year. If one begins at $14,000 per year, after 10 years this person might contribute $20,000 per year or more. Perhaps not. If a person enters knowing that he will retire with what he saves for the most part, he will certainly be more motivated to save more. As mentioned by another poster, in the last 10 years or so the person shifts to a more conservative allocation for an earning of perhaps 5-6%. If less goes to STRS from the employee or by the district, the employee should be paid more at the same time. Obviously, quality options in which to save must be in place, as we have all said.

 

As for paying for the current and soon retirees who receive more than 1.0, also illustrative, that would need to fall into the reform. Continuing with a flawed system is not the answer. At some point, the music must be faced.

 

Again, my concern is based on the issue of sustainablility. None can predict, we know this. If now we are at a 42B liability do we jack up the future withholding or reduce future benefits? The issue is sustainability. Again, it was raised to 2.4 during a fabulous bubble that shortly thereafter burst. And again, we have recently seen another burst. If we knew there would never be another burst and if we knew that all future retirees would not live long in retirement, there would be nothing to worry about.

 

As with SS, sustainability is the issue. What will be done if the liability climbs to 60B? I prefer to be optimistic, but I just don't think 2.4 nor SS are sustainable.

 

As a matter of pure personal responsibility, I believe the person should rely more on self rather than the govt--same with SS.

 

Edy

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Hello. The calculation of $2M is an illustration, of course. Based on 35 years at 8% and contributing $14,000 per year, the end would be $1.9M+ according to a googled calculator. Of course the market is not constant and some will not contribute that amount. Some perhaps more if they knew they were to receive little in a pension. Presumably, a person would/should increase the amount contributed each year. If one begins at $14,000 per year, after 10 years this person might contribute $20,000 per year or more. Perhaps not. If a person enters knowing that he will retire with what he saves for the most part, he will certainly be more motivated to save more. As mentioned by another poster, in the last 10 years or so the person shifts to a more conservative allocation for an earning of perhaps 5-6%. If less goes to STRS from the employee or by the district, the employee should be paid more at the same time. Obviously, quality options in which to save must be in place, as we have all said.

 

As for paying for the current and soon retirees who receive more than 1.0, also illustrative, that would need to fall into the reform. Continuing with a flawed system is not the answer. At some point, the music must be faced.

 

Again, my concern is based on the issue of sustainablility. None can predict, we know this. If now we are at a 42B liability do we jack up the future withholding or reduce future benefits? The issue is sustainability. Again, it was raised to 2.4 during a fabulous bubble that shortly thereafter burst. And again, we have recently seen another burst. If we knew there would never be another burst and if we knew that all future retirees would not live long in retirement, there would be nothing to worry about.

 

As with SS, sustainability is the issue. What will be done if the liability climbs to 60B? I prefer to be optimistic, but I just don't think 2.4 nor SS are sustainable.

 

As a matter of pure personal responsibility, I believe the person should rely more on self rather than the govt--same with SS.

 

Edy

 

 

Just how many starting teachers can afford to contrubte 14k to a saving plan given that they have car loans, insurance, student loans and and other bills to pay. Tell me what is starting salary for new teachers in CA- 35-40K and what is the average salary for CA teachers at career midpoint, say 45, maybe $65-70k for which an 8% contribution to CALSTRS is required.

 

Where are these teachers going to get the extra 8% to save for their own retirement not to mention what investments will generate an 8% return?

 

Your analysis of the sustainability of SS funding deficiency is misplaced. SS funding problems can be solved by raising the contribution rate for employers and employees by 1% or by raising the SS wage base to 160K to restore the historical application of SS tax to 90% of all wages paid instead of the 85% rate in effect.

 

Also over 33% of Social Security recipents are taxed on their SS benefits which accounts for 2% of SS revenues. As the number of retirees increase the amount of taxes collected by SS will increase since the 25k/32k threshold for taxation is not indexed for inflation.

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As a matter of pure personal responsibility, I believe the person should rely more on self rather than the govt--same with SS.

 

 

 

Social Security was never intended to be anything more than a "floor." I remember reading an interview with one of the senior actuaries who helped to establish the Social Security system-- I can't recall the source, or I would cite it-- in which he stated, in effect, that the average beneficiary should receive about 15% of what they needed from Social Security. Over time, people have forgotten that.

 

But in the days before Social Security, most people worked as long as they were able. When they were not able to work, their family was their safety net.

 

 

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As a matter of pure personal responsibility, I believe the person should rely more on self rather than the govt--same with SS.

 

 

 

Social Security was never intended to be anything more than a "floor." I remember reading an interview with one of the senior actuaries who helped to establish the Social Security system-- I can't recall the source, or I would cite it-- in which he stated, in effect, that the average beneficiary should receive about 15% of what they needed from Social Security. Over time, people have forgotten that.

 

But in the days before Social Security, most people worked as long as they were able. When they were not able to work, their family was their safety net.

 

 

That may have been true when social security was created in 1937 but LBJ raised SS benefits as part of his War on Poverty in the 60's. Today the SS benefit for an employee with average earnings of $40,000 is about $16,400 or 41% of pay. If 16,000 is 15% of income needed in retirement then you would need $106,666. At the highest wage level of $108,000 the max benefit is about 28,800 or 27% of pay which would mean retirement income needs of $192,000. I think SS provides 40% of all retirement income.

 

The actuary is probably Robert Myers who just died.

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That may have been true when social security was created in 1937 but LBJ raised SS benefits as part of his War on Poverty in the 60's. Today the SS benefit for an employee with average earnings of $40,000 is about $16,400 or 41% of pay. If 16,000 is 15% of income needed in retirement then you would need $106,666. At the highest wage level of $108,000 the max benefit is about 28,800 or 27% of pay which would mean retirement income needs of $192,000. I think SS provides 40% of all retirement income.

 

The actuary is probably Robert Myers who just died.

 

 

I believe you're correct that it was an interview with Robert Myers.

 

For what it's worth, I have a book which I bought from a library book disposal sale, titled "Social Security: The First Half Century." I think I paid $1 for the book. But the interview is not in the book; I read it on the Web somewhere.

 

In the back of the book is a time-line of significant events in the history of Social Security covering 1935 to 1985. LBJ was not the only one to raise benefits; starting about 1950, benefits were raised/liberalized a number of times:

 

1950: 77% increase in OASI benefits;

1952: 12.5% increase in OASI benefits;

1956: OASI becomes OASDI;

1958: 7% increase in OASDI benefits;

1968: 13% increase in OASDI benefits;

1969: 15% increase in OASDI benefits;

1971: 10% increase in OASDI benefits;

1972: 20% increase in OASDI benefits;

1973: 7% increase in OASDI benefits.

 

There must have been increases after the book was published in the 1980's. (Edit: scroll down on this page to read "The Story of COLAs")

 

I think it is worth noting that CalSTRS predates Social Security. In their (CalSTRS') literature, they state that a CalSTRS pension is intended to replace 60-65% of the retirement income needs of a career teacher. I'm not sure if that was the intent at incept, but clearly there has been a shift in the public perception, with respect to both Social Security and CalSTRS/PERS.

 

To bring this thread back around to better consistency with the mission of the forum hosts, I can't help but to wonder if things would be different if the unions (NEA/CTA, in particular) had used some of their power and influence to help their members get better access to reasonable 403(b), et al., vehicles. Granted, as recently as 15 years ago, there was little awareness of the starkness of the landscape that greeted would-be 403(b) savers, but since then, awareness has grown-- it's ten years since "shark attack" now-- and the NEA/CTA still hasn't done doodly-squat.

 

The CTA could afford to spend $1.25 million on the "no on 8" campaign here in CA-- something which has no connection to teacher pay and benefits that I can see-- and the NEA spends a lot of money every year on very peripheral issues, to put it charitably, but where are they on this issue? Still pushing annuities for endorsement revenue.

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Hello. Some good points have been made. I was asked about a calculation that I had approximated. Briefly, if STRS were reduced from 8% by teacher and 8.25% by district, presumably the district could pass on to the teacher, maybe, of course, and thus allow the teacher to save more. For sure to happen, of course not, understood. As time goes, the teacher, upon knowing that he would receive less in a pension, would be more motivated to save more. How much, that is up to the educator.

 

I remaine convinced that the best solution to this $43B dilemma is to reduce future benefits. I can see that this is not a popular idea.

 

Does anyone have any other suggestions???

 

Jacking up future contributions stinks. Any ideas???

 

Edy

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Hello. Some good points have been made. I was asked about a calculation that I had approximated. Briefly, if STRS were reduced from 8% by teacher and 8.25% by district, presumably the district could pass on to the teacher, maybe, of course, and thus allow the teacher to save more. For sure to happen, of course not, understood. As time goes, the teacher, upon knowing that he would receive less in a pension, would be more motivated to save more. How much, that is up to the educator.

 

I remaine convinced that the best solution to this $43B dilemma is to reduce future benefits. I can see that this is not a popular idea.

 

Does anyone have any other suggestions???

 

Jacking up future contributions stinks. Any ideas???

 

Edy

 

 

Raise the retirement age for full benefits to 65 and reduce benefits actuarily for retirement at lower ages as is done for private pensions to compensate for longer payout period.

 

Reduce the benefit accrual rate to less than 2.4 for futures years.

 

But making these changes will not reduce the current $42B deficit that requires the 18% of payroll contribution rate. If anything employee and employer contributions will have to rise to keep the deficit in pension assets from increasing, e.g., 14% increase in contributions recommended by STRS pension actuary.

 

Only question is how soon after the 2010 elections these changes will be implimented.

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Only question is how soon after the 2010 elections these changes will be implimented.

 

 

It will be a long time on the left coast. School districts here in CA are in a tight spot right now. They are grappling with GASB accounting rules changes which have forced them to choose between amortization of past service liabilities-- in my district, the amount of money being thrown at this problem basically doubled, until budget cuts (mostly) forced them to scale back-- or carrying these liabilities on their balance sheets, which makes it more expensive for them to borrow money. In addition, the state-- "liberalism's laboratory," as George Will put it-- is in the process of imploding, and the predictions that I've heard are not encouraging. At the county office that funnels money to the districts, they say privately that it will be three to five years before we can hope for things to improve. California is in very deep doo-doo.

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