15 Jul CalSTRS Explained: Understanding California’s Hybrid Retirement System for Teachers
As the most populous state in the country, California is a destination for many of the country’s top professionals, including teachers.
In fact, California teachers make on average $20,000 more in annual salary compared to the rest of the United States.
But how do retirement projections stack up for teachers in California? Will a California teacher pension offer a stable retirement in a state notorious for a high cost of living? Do California teachers qualify for social security?
Here, the retirement experts at Appreciation Financial explain everything you need to know about CalSTRS — California’s hybrid retirement system for teachers.*
CalSTRS: A Brief Overview
CalSTRS is California’s pension plan for teachers. It stands for California State Teachers’ Retirement System and was established in 1913 to provide retirement benefits to California educators.
CalSTRS is the largest education-related pension program in the world and the second-largest pension fund in the entire United States, with $306.7 billion in assets.
The investment strategy employed by CalSTRS is to buy long-term net cash flows and potentials for capital gains at reasonable prices.
How does CalSTRS differ from other state-run pension plans?
Though similar to traditional teachers’ pensions, CalSTRS differs from other defined-benefit retirement plans in several ways.
Compared to many other states, more educators are eligible for CalSTRS enrollment. Teachers from pre-K through community college instructors have access to this retirement option.
Hybrid Retirement System
CalSTRS is unique because it is not a traditional pension plan. Instead, it is what is called a hybrid retirement system. The hybrid system includes:
- Defined benefit plan
- Cash balance plan
- Voluntary defined contribution plan
Spouses and dependents are also offered survivor and disability benefits under CalSTRS.
Defined Benefit Plan
This is the traditional pension portion of the CalSTRS retirement plan. Like other pension plans, it is calculated via a formula, including:
- Teaching service years
- Final salary averages
The defined benefit plan portion of CalSTRS is much like how other states structure their pension plans. The defined benefit plan also features a supplement program for members to accrue additional savings.
Cash Balance Plan
The cash balance plan is an optional plan designed specifically for part-time teachers or adjuncts working at California community colleges. This program is an IRS Code 401(a) defined benefit option.
Voluntary Defined Contribution Plan (Pension2)
Pension2 gives California educators the option to enroll in additional retirement plans via payroll deductions. These options include:
- Flexible 403(b)
- Roth 403(b)
In addition, teachers can choose from other tax-advantaged options.
No Social Security Benefit
California is one of several states where teachers do not pay into social security. Therefore, educators will not receive those benefits at the age of 65, making CalSTRS payments the significant source of their retirement income.
Who administers CalSTRS?
The Teachers’ Retirement Board is in charge of administering and ensuring that benefits are paid. The board is composed of 12 members, including:
- Active CalSTRS members
- A retired CalSTRS member
- Public representatives
- A school board member
- Other state officials
The diverse board ensures the integrity of CalSTRS. All meetings are archived on video so CalSTRS enrollees can stay informed of the latest changes.
CalSTRS Caution: Risks of Significant Underfunded Liabilities
Like many pension plans across the country, CALSTRS is also experiencing significant underfunded liabilities. In 2016, CALSTRS reported a gap of $107.3 billion. What is even more troublesome is that these liabilities have grown by over $80 billion since 2006.
Further compounding the issue, CalSTRS pension costs are the fastest rising costs in California school budgets, leaving many officials wondering how this will affect expanding academic programs, school nurses and healthcare, school counselors, and future pay raises for teachers. In the 2020-2021 school year, CalSTRS pension costs were estimated to account for 11% of California school districts’ budgets.
So, what are some reasons for the underfunded liabilities? Here are some factors:
Weaker Investment Returns
Pension funds like CalSTRS utilize long-term investment strategies. However, since 2010 and the Great Recession, future returns in investments for pensions have been projected to be lower.
Shifting Demographics in California
Several factors contribute to this, but the most significant is the declining birth rate in California. And that means fewer younger workers to support an older retirement age population.
State Policy Changes
In 2013, California lawmakers passed bills that reduced defined benefits while increasing contributions from employees and employers. Coupled with increasing the retirement age, these policy changes have caused further uncertainty regarding CalSTRS.
Rising Healthcare Costs
Rising healthcare costs play a significant role in CalSTRS’s underfunded liabilities. Each year, healthcare costs increase, putting more pressure on the hybrid pension system to adjust for the difference.
Schedule Your Free CalSTRS Pension Review
If you are a teacher in California, you want to know if your California teacher pension will provide you with a stable retirement.
Though this article is a good introduction to the intricacies of CalSTRS, you probably have more questions.
At Appreciation Financial, the experienced team of retirement specialists offers free pension reviews specifically regarding CalSTRS. The financial advisors will examine your pension plan along with your other investments to create a retirement plan designed specifically for you.
Appreciation Financial understands that everyone is unique and that a retirement plan for one person might not offer a solution for someone else. Therefore, your retirement strategies are tailored specifically for you and your family.
*Appreciation Financial is not employed by, nor affiliated with CalSTRS.