After decades of static retirement formulas for California’s teachers, the stock market boom of the 1990s erased deficits in the Teachers’ Retirement Fund and paved the way for a host of improvements in benefits. Coupled with increasing salaries, the improvements at last provided teachers with a solid foundation for financial security in retirement.
Unfortunately, the way the benefit improvements were structured, they also ushered in a host of questions about the basic fairness of the pension system. Teachers already retired received minimum guaranteed pensions up to $20,000 for 30 years service, a boost of up to 6 percent in their monthly benefit, and premium-free access to Medicare coverage if they weren’t already eligible.
Educators retiring under the new rules, however, received significant benefit improvements. For example, while average retirement age and years of service increased less than two percent between 1997 and 2004, salaries jumped 38 percent and pensions went up 48 percent.
For years, average benefit increases from year to year were less than $50 a month for retired educators. Suddenly, under the improved plan, monthly increases were nearly $1,000 more. The most current retired teacher receives more than $1,100 per month more than the system’s average monthly benefit.
The California Retired Teachers Association believes that as long as pension contribution rates remain the same—as they have for employers and employees for more than 20 years—then the formulas for computing retirement benefits should be the same.
Greater efforts must be made to redress deficiencies in retirement for educators who retired before the improvements were enacted. In addition, we oppose short-term incentives such as longevity bonuses which favor one class of teachers over another. Equal service deserves equal reward.
For many years, California teachers faced financial uncertainty in retirement. The pensions they received were inadequate to meet targeted income replacement ratios, according to an independent CalSTRS study commissioned in 1998 and updated in 2004.
In addition, teacher salaries were low, particularly in comparison to other professional fields with similar educational requirements. As recently as 1996-97, California teacher salaries ranked twenty-second nationally, when the state’s higher cost of living is taken into account.
Compounding the inadequacy of the basic pension, most retired teachers were also subject to losses in expected Social Security income due to the Government Pension Offset and the Windfall Elimination Provision, and many were not eligible for premium-free Medicare Part A coverage before 2000.
Other States’ Examples
California was not the only state to experience major increases in the market value of its pension fund during the 1990s. Many other states also saw major increases in investments. However, other states took a very different approach to providing members with increased benefits.
New Jersey and Ohio, for example, improved the formula for careers for current educators and then recalculated benefits on that formula for existing retirees, boosting their pensions. Both states also provide health care coverage for retirees, unlike California where less than half received such coverage from their local school district.
In Texas, fund improvements led to a program of Consumer Price Index “catch-ups” to equalize pension benefits. In 1995 and 2001, retirement formulas were improved for active teachers and recalculated on the same basis for retirees. Today, there is less than a $100-a-month difference between a Texas teacher who retired in 1970 and a 2000 retiree.
Retirees in Minnesota and Wisconsin have also seen substantial improvements in their retirement benefits.
The Cost of Fairness
To redress the inequities in the current retirement system is not as expensive as it might seem. Many of the pension improvements enacted in 2000 had incentives for teachers to stay on the job longer and retire at age 63 instead of the normal retirement age of 60. Teachers who retired before these improvements were enacted obviously cannot respond to such incentives, since they have completed their careers.
Most retirees would primarily benefit from modest improvements in the factors used to compute benefits and by setting the pension based on the highest-year of compensation, which is provided for teachers with 25 years of more of service.
For the average 1997 retiree, applying equity to their pension would boost their initial monthly benefit by approximately $162 per month, or nearly 14 percent.
The fundamental goal of any retirement plan is to provide financial security to its members after a lifetime of service. The CalSTRS system has made significant progress toward this goal in recent years, but has to address basic issues of fairness to ensure that all education careers earn the financial security they deserve.