Study Says Mandatory Social Security Would Hurt Schools and Educators
Under a Social Security structure, members´ and employers´ choices would be to pay more or get less.
WEST SACRAMENTO, CA – California public educators and school districts would have to either pay more for their retirement or settle for lower benefits if Social Security were offered to them, according to an analysis conducted for the California State Teachers’ Retirement System (CalSTRS).
The analysis, presented to the CalSTRS Benefits and Services Committee June 1, is in response to recent studies by other government bodies that suggest inclusion of Social Security is a way to lower the cost of the CalSTRS defined benefit. The study looked at two ways to implement mandatory Social Security for future members: maintain current benefit levels and maintain current benefit cost.
Under the level benefit approach, contributions would jump by up to 12.4 percent of pay, divided up between members and employers, experts from the independent consulting actuary Milliman told the committee. In dollar terms, that amounts to an immediate $1.8 billion annual increase.
Under the level cost approach, members and employers would not pay more, but would see a 33-percent reduction in the retirement benefit from current levels. That would reduce the pension’s average replacement of pre-retirement income from 61 percent currently to 43 percent under the new structure.
The committee directed Milliman to broaden its research to other CalSTRS members, such as those who have left the system or second-career educators. The CalSTRS study focused on members at age 62 with either 25 or 30 years of service.
A separate CalSTRS study compared CalSTRS with 11 other public teacher defined benefit pensions that do not include Social Security. CalSTRS was found to be not overly generous, falling in the middle of the pack, between Texas and Kentucky. The measure was the ratio of replacement of pre-retirement income each plan offered. Texas replaces 58 percent and Kentucky replaces 63 percent of their members’ pre-retirement income.
“Tacking Social Security onto a system developed to adequately provide for retired educators would place an additional burden onto the backs of the teachers of California and the districts that employ them,” said CalSTRS Board Chair Dana Dillon, an intermediate grade school teacher from Weed. “It is already tough enough in California to entice college students to become teachers, and to retain them, when they see career challenges like pay cuts and annual rounds of layoffs. Reducing their retirement security would make that picture all the more bleak.”
The analysis attributes the detrimental impact on CalSTRS members and employers to the divergent designs of the two plans. While Social Security benefits are determined by a formula that pays relatively higher amounts to workers with lower wages, CalSTRS benefits are paid in direct proportion to income. Public educators also tend to earn incomes that are higher than those of average Americans because their levels of education and experience tend to be higher, the report said. The result is that the CalSTRS Defined Benefit pension paid to a retiring public educator will be significantly higher than the Social Security benefit paid to that same person.
“Mandating participation in Social Security poses a stark choice to our members and their employers regardless of which way such a requirement would be implemented,” said Jack Ehnes, CalSTRS Chief Executive Officer. “It reduces a defined benefit that even 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.”
The California State Teachers’ Retirement System, with a portfolio valued at $155.4 billion, is the largest teacher pension fund and second largest pension fund in the United States. It administers retirement, disability and survivor benefits for California’s 852,000 public school educators and their families from the state’s 1,600 school districts, county offices of education and community college districts.