Copyright© 2004 by School Services of California, Inc.
Volume 17 For Publication Date: December 17, 2004 No. 24
Contribution Levels
Could Increase for Both Employer
and Employee Members of CalSTRS
With a massive funding shortfall
looming, the State Teachers’ Retirement System (CalSTRS) is considering
increasing pension contributions or reducing benefits for newly hired teachers.
CalSTRS officials predict benefits for future retirees may have to be cut by $50
to $500 a month to erase a funding gap estimated to be $23.1 billion in the next
30 years.
The following is a series of
options that may be considered by CalSTRS:
§
The state could sell pension obligation bonds. CalSTRS would use the
proceeds to increase investments, hoping to generate enough returns to pay off
the bonds and close the shortfall.
§
The $23.1 billion pension obligation could be paid off over 40 years,
instead of 30 years. This would siphon off investment returns and contributions
over a longer period, rather than investing them.
§
Benefits could be reduced for teachers hired after January 1, 2006. This
includes basing final pension on the highest three years of compensation instead
of the current one year. Credit for years of service and unused sick leave would
no longer be used to calculate benefits. Retirees would be required to pay for
Medicare coverage.
§
CalSTRS could eliminate an annual cost-of-living adjustment of 2%.
Most of the changes that CalSTRS
may consider implementing must be approved by the Legislature, including higher
contribution rates by new teachers, school districts, or the state. By far,
raising contributions would be the quickest way to wipe out the shortfall. But
CalSTRS is reluctant to move down that path because the state and school
districts are wrestling with budget deficits and teachers are being hit by
rising costs, including higher health-care premiums.
CalSTRS is not alone in dealing
with an under-funded pension. During the unprecedented bull market in the 1990s,
pension plans had extra cash and many, including CalSTRS, raised benefits. A
CalSTRS consultant concludes that the pension fund needs an infusion of $1
billion in the next two years to ensure there is enough money to fund benefits
30 years from now. That amount could change when a new analysis comes out
this spring.
Staff at CalSTRS, the nation’s third largest public pension plan with $118 billion in assets, have reassured beneficiaries that the shortfall won’t jeopardize pensions for its 735,000 retired and active teachers since they are guaranteed by law. CalSTRS say the fund is sound and there is enough money to pay benefits for another two decades—even if contributions remain unchanged.
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