Blog entry Jack Ehnes

Mandatory Social Security Costs More, Offers Less

Several studies have recently suggested that including Social Security may lower the cost of the CalSTRS defined benefit. CalSTRS commissioned a study that found just the opposite to be true.

What the study found was that, compared to today, our members and school districts would have to either pay more for their retirement or settle for lower benefits with Social Security as part of the CalSTRS plan.

Analysis finds faults

The analysis was conducted by consulting actuary Milliman, which looked at two ways to include Social Security for future members, focusing on:

  1. Maintaining current benefit levels
  2. Maintaining current benefit cost

Under the first approach, contributions would jump by as much as 12.4 percent of pay, divided up between members and employers. In dollar terms, that amounts to an immediate $1.8 billion annual increase.

Under the second approach, members and employers would not pay more, but would see 33-percent less in retirement benefits from current levels. That would reduce the pension’s average replacement of preretirement income from today’s 61 percent, to 43 percent under the new structure.

While the CalSTRS study initially focused on members age 62 with either 25 or 30 years of service, the Teachers’ Retirement Board directed Milliman to broaden its research to include members with different career paths, such as those who have left the system or who are second-career educators.

Impact detrimental to CalSTRS members

The detrimental impacts to CalSTRS members and employers come down to the divergent designs of the two plans. On one hand, Social Security benefits are determined by a formula that pays relatively higher amounts to workers with lower wages. On the other, CalSTRS benefits are paid in direct proportion to income, so higher-paid members get higher benefits.

Additionally, educators tend to earn more because their education levels and experience tend to be higher than those of average American workers.

Mandating participation in Social Security poses stark choices to our members and their employers regardless of how it’s implemented. It would further reduce a defined benefit that even pension critics have called modest but adequate.

Placing more of our members’ retirement into either Social Security or worse, a defined contribution vehicle, would impose additional burdens on school districts, already financially distressed, and cost taxpayers more in the long run.

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