Pension Neutrality: California

Analysis of California's policies

California's pension system is based on a benefit formula that is not neutral, meaning that each year of work does not accrue pension wealth in a uniform way until teachers reach conventional retirement age, such as that associated with Social Security.

Teachers' retirement wealth is determined by their monthly payments and the length of time they expect to receive those payments. Monthly payments are usually calculated as final average salary multiplied by years of service multiplied by a set multiplier (such as 1.5). Higher salary, more years of service or a greater multiplier increases monthly payments and results in greater pension wealth. Earlier retirement eligibility with unreduced benefits also increases pension wealth, because more payments will be received.

To qualify as neutral, a pension formula must utilize a constant benefit multiplier and an eligibility timetable based solely on age, rather than years of service. Basing eligibility for retirement on years of service creates unnecessary and often unfair peaks in pension wealth, while allowing unreduced retirement at a young age creates incentives to retire early. Plans that change their multipliers for various years of service do not value each year of teaching equally. Therefore, plans with a constant multiplier and that base retirement on an age in line with Social Security are likely to create the most uniform accrual of wealth.

California's pension policy contains many provisions that benefit older and more experienced teachers. The plan's multiplier is 2 percent at age 60, increasing thereafter to a maximum of 2.4 percent. Teachers increase their benefit by .033 for each quarter of a year they teach beyond age 60, reaching the maximum at age 63; however, teachers with at least 30 years of service may add an additional 0.2 percent up to the maximum of 2.4 percent (reaching their maximum at 61-1/2 years) and also receive a monthly longevity bonus of $200 for 30 years, $300 for 31 years and $400 for 32 or more years of service (these bonuses only apply to teachers who earn 30 years of service by January 1, 2011).

Additionally, teachers who retire with 25 or more years of service are entitled to have their benefits calculated based on their final year's salary, rather than averaging the last three years as retirees with less experience must do. Also, while all teachers are eligible for unreduced retirement at the same time, early retirement with reduced benefits is dependent on years of service. For example, a teacher with 30 years of service may retire with reduced benefits at age 50, while other vested teachers with less than 30 years of service may not retire early with reduced benefits until age 55.

Citation

The California State Teachers' Retirement System, 2011 Member Handbook http://www.calstrs.com/help/forms_publications/printed/MemberHandbook/index.aspx

Recommendations for California

Utilize a constant benefit multiplier to calculate retirement benefits for all teachers, regardless of years of service.
Each year of service should accrue equal pension wealth. California should use a pension formula that treats each year of service equally. 

End early retirement eligibility based on years of service.
California should change its practice of allowing teachers with 25 or 30 years of service to retire earlier than other members. If retirement at an earlier age is offered, it should be offered to all vested members, and benefits should be reduced accordingly to compensate for the longer duration they will be awarded.

Align eligibility for retirement with unreduced benefits with Social Security retirement age.
California allows teachers to retire before conventional retirement age. As life expectancies continue to increase, teachers may draw out of the system for many more years than they contributed. This is not compatible with a financially sustainable system (see Goal 4-H).

State response to our analysis

California was helpful in providing NCTQ with facts that enhanced this analysis. 

In addition, the state maintained that NCTQ's analysis does not address the reason for these benefit enhancements for teachers with greater years of service—retention. These benefit enhancements encourage educators to continue to teach in California, allow public school districts to retain qualified teachers and address teacher shortages.

Last word

While these benefits may retain teachers at a certain period in their careers, they do not take into account each teacher's effectiveness nor do they attract or retain teachers earlier in their career or teachers who know they may be more mobile.  Defined benefit plans' benefits are so back loaded and tied to longevity, that the dollars spent on retirement are often not valued because they are not seen by potential employees.  Many individuals may never enter the profession if they know they may not be able to dedicate 25 or more years within one system because they can receive more balanced compensation in a different sector. Teachers who move between states, while still dedicating their life to teaching, receive far less in retirement benefits even though they educated just as many students for just as long. Further, our systems need to attract highly effective teachers who can produce great results, especially in high-needs schools, whether or not they are prepared to make a career-long commitment or to teach only for shorter periods of time.  A defined benefit pension system does not grant shorter-term teachers the same pension wealth per year of teaching as a teacher who was able to teach longer in a different assignment. These policies may give a teacher an incentive to remain in the field from year 24 to year 25, but they may not encourage a fifth-year teacher to stay for the sixth year.