A Glance at Governor Brown’s Twelve-Point Pension Plan
On October 27, 2011, Governor Brown unveiled his 12-Point Pension Plan. As the debate around pension reform continues, it’s important to emphasize that the most pressing need facing CalSTRS was not included in the Governor’s proposal: A plan of action to address the long-term funding needs of the system. To be clear, the authority and responsibility for this action rests with the Governor and the Legislature.
Although the Teachers’ Retirement Board has not taken a position on the Governor’s 12-point plan, CalSTRS has conducted a detailed analysis which you can find at the links below.
Unfortunately, the proposal does not address the substantial differences within the CalSTRS pension system, including the facts that CalSTRS already administers a comprehensive hybrid retirement system and that educators do not receive Social Security benefits for their CalSTRS-covered employment.
Not all of the 12 points in the Governor’s proposal affect CalSTRS, such as those pertaining to health care and board governance. Of the points that do have an impact on CalSTRS, one of the more significant is a possible 40 percent reduction in retirement benefits for future members. Although this reduction has been estimated to provide long-term annual employer savings of about $800 million, those savings would not be fully realized until some 30 to 40 years from now as new educators enter the system over time.
The proposal does not provide much detail into how the defined contribution plan would be administered, other than the funds would be professionally managed. It is also not clear whether members and employers would be required to make any minimum or maximum contributions. What could result, however, is a reduced cash flow into the defined benefit program that would in turn increase the liquidity needs of the defined benefit program to pay current benefits.
These increased liquidity needs may require the allocation of assets to lower-yielding investments, decreasing the expected rate of return on the defined benefit program assets and thereby increasing the cost of the defined benefit program. There is also an additional, up front cost associated with implementing these new programs.
The plan also proposes to require equal sharing of normal pension costs. This would result in an increase in contributions paid by current members that is estimated to generate an additional $250 million in annual revenue. Implementing this piece of the proposal would result in an increase to current member contributions. Any increase in statutorily set member contribution rates raises significant legal issues involving the vested rights of CalSTRS members.
Although the full retirement age for new members is increased to age 67 under the proposal, it isn’t clear whether CalSTRS members will work longer, or simply receive a lower benefit. CalSTRS members’ current average retirement ages are already consistent with those in the private sector.
As stated earlier, the most pressing need facing CalSTRS is to resolve the long-term funding needs of its primary retirement program. At the request of the Legislature, CalSTRS is developing scenarios that show what any potential impact of increased contributions may have on the plan’s funding status. Meanwhile, CalSTRS will continue to work with the Governor, the Legislature and our stakeholders as they develop a plan that protects the fund and our members.