There are a lot of questions and concerns during these tumultuous economic times. This section will separate fact from fiction. 

Fiction: Shifting CalSTRS members to a 401(k) plan would be more cost effective than maintaining the defined benefit system.

Fact: It would be extremely costly for CalSTRS to freeze its current defined benefit plan system and transition to a 401(k) system.

First, CalSTRS would be responsible for maintaining defined benefit plans for all current members, which they are entitled to by law, until they pass away or are no longer receiving benefits. This would require CalSTRS to operate two systems, one for existing members and another for the new 401(k) plans. Even more significant, this change would have an adverse impact on cash flow, resulting in a required change to the fund’s asset allocation.

Also, studies have shown that defined benefit systems are more cost efficient because they require less administrative costs than a 401(k) program. On average, the annual administrative costs for CalSTRS are 0.2 percent of its assets. Defined contribution plans, such as 401(k) systems, cost 1 to 2 percent to administer.

Fiction: It would be better for CalSTRS members to pay into and receive a Social Security benefit.

Fact: A coordinated benefit structure for CalSTRS members that included Social Security contributions or factored them into a member’s benefits would add an additional cost of $1.8 billion each year for employers and members, or reduce benefits for CalSTRS members by 33 percent. 

Fiction: Taxpayers foot the entire bill for CalSTRS members’ retirement benefits.

Fact: CalSTRS benefits are paid by contributions from members, school employers and the state. The CalSTRS investment earnings on those contributions are the primary source of benefit funding.

Through their entire careers, CalSTRS members contribute 8 percent of their pay every month toward their retirement. In addition, employers are responsible for contributing 8.25 percent of monthly pay while the state contributes just over 2 percent (which previously was 4.607 percent, but was reduced a decade ago).

Fiction: Limiting annual payouts to $100,000 per year would solve CalSTRS funding gap.

Fact: Of the nearly 220,000 CalSTRS members receiving retirement benefits from their decades of service, a very small proportion—just 2.2 percent—receive pensions that exceed $100,000 annually. Therefore, the impact of limiting these benefits is minimal and would not significantly affect the solvency of the fund.

Fiction: CalSTRS doesn’t need increased contribution rates to solve its unfunded liability.

Fact: The most recent valuation projected that absent changes in contribution rates or liabilities, the CalSTRS fund will be depleted in the early 2040s. At that time, the annual cost to the state is projected to be $9 billion (in today’s dollars) to assume that obligation as required by the state Constitution.

The state must act to adopt a responsible funding strategy that will protect the state General Fund and uphold the state’s promise to teachers. Without legislative approval for increased contributions, CalSTRS would need a more than 20 percent investment return each year for the next five years to achieve full funding in 30 years.

Fiction: CalSTRS benefits are more generous than other public pension funds.

Fact: Last year, CalSTRS members—on average—retired at nearly age 61 after almost 26 years of service with a pension that replaced about 55 percent of their highest salary. When compared to other public employee pensions systems, CalSTRS members receive the lowest percentage of benefits. When compared to other teacher pension plans not covered by Social Security, CalSTRS benefits are in the middle.

Fiction: Benefit enhancements made in 1998 and 2000 led to CalSTRS funding gap.

Fact: The primary reason for CalSTRS funding gap is this decade’s lower than expected investment returns as a result of the 2001 dot com bust and the 2008 world economic downturn. When we look at the past 20 years, CalSTRS has averaged an annual investment return of 8.2 percent, and in the 2010 calendar year posted a 12.7 percent return. This historical average is above CalSTRS investment assumption rates, which the board recently lowered from 7.75 percent to 7.5 percent.

Benefit enhancements were made in 1998 and 2000 to address a teacher shortage. However, they were enacted with a financing plan based on reasonable expectations about future investment returns, and some were only enacted temporarily. Some of these enhancements, like the Longevity Bonus, sunsetted in December 2010. Continuing these enhancements would have cost $12 billion over 30 years.