What You Need To Know About The Nation’s Two Largest Pension Funds
As a financial advisor based in San Diego, California, I’ve had numerous clients come to me with questions about two specific pension plans: The California Public Employee’s Retirement System (CalPERS) and the California State Teacher’s Retirement System (CalSTRS). They’re pretty substantial, with CalPERS leading the nation with over 1.8 million members (as of 2015). CalSTRS, meanwhile, is the world’s largest educator-only pension plan, with nearly 900,000 members as of 2016. They are also the two largest pension funds in the United States.
Knowing the details of your retirement plan is an important step toward building the retirement you want, and making sure you’re adequately funded for the next chapter of your life. If you live in California, you are probably covered by either CalSTRS or CalPERS if you have a pension. If you are a teacher, you’d be covered by CalSTRS, while any other California public employee can be covered by CalPERS.
Let’s go into the details of these two pension funds.
CalSTRS
Founded in 1913, The California State Teacher’s Retirement System was designed to provide benefits (retirement, disability, and survivor) for California educators. It’s the second-largest pension fund in the U.S., coming in after CalPERS. It’s governed by the Teacher’s Retirement Board, which sets the rules and administration for CalSTRS. There are also two advisory committees.
CalSTRS calculates your benefits based on three factors; your age, your income, and your years of service. You can also continue to work after retirement with CalSTRS, as long as you take jobs with private employers or any California State University. If you’re covered by CalSTRS, you do not get Social Security.
CalPERS
The California Public Employee’s Retirement System is the largest pension fund in the United States, and is designed to provide benefits for over one and a half million public employees in California, as well as their families. It’s governed by a Board of Administration with thirteen members, and is also known for its shareholder activism. It’s considered an incredibly influential pension plan, and the fact that its featured stocks tend to do better than others has led to the term “CalPERS effect.”
CalPERS calculates your benefits the same way as CalSTRS, but there are differences between the two. For example, with CalPERS, you may retire earlier with fewer years of service, and you also contribute to Social Security.
The importance of pensions
You may be wondering: why are pensions so important? If you’re considering retirement, be it far in the future or coming up soon, you probably have one main concern. Finances. I’ve always stressed the importance of having enough savings for retirement so you can live the life you earned, without having to struggle to make ends meet in your later years. You spent your working years earning your money, saving, and crunching numbers… Your retirement should be about doing the things you love! But, if you don’t budget correctly, you can find yourself overspending.
If you’re like the majority of Americans, you probably don’t have enough in savings. In fact, 71% of Americans say they don’t have enough saved for retirement.
Both CalSTRS and CalPERS are defined benefit plans, meaning the money in your account is given to you as a monthly income, is determined by a specific formula, and is sponsored by your employer. Compare this to a defined contribution plan, like a 401(k), where you contribute a fixed amount of your income each year, your employer may match your contribution, and are lower risk for your employer.
Defined benefit plans guarantee you income after you retire, meaning you are less likely to overspend, and even if you do, you know you still have money coming in. Approximately 13% of Americans receive pension income as of 2008.
According to the National Institute on Retirement Security (NIRS), a defined benefit plan is a great option for California teachers. In a 2016 report, they found that CalSTRS spending helps support millions of American jobs, over a trillion in national economic output, and billions in tax revenue, both on the state and federal levels. Other studies show that defined benefit plans are the best option for teachers, as CalSTRS (and other pension plans) rewards and benefits long-term employers, which educators mostly are. Therefore, not only do pensions benefit the employees, but also the economy, both nationally and locally.
The California pension crisis
A critical part of your retirement plan is the investment the state of California makes on your behalf in the way of CalSTRS and CalPERS. However, many are finding themselves in jeopardy due to California’s pension crisis, brought on by the 2008 recession.
Currently, the two largest pensions in the U.S. don’t have the funds necessary to pay what was promised. CalSTRS is facing a $71 billion deficit, which only worsens every day by millions of dollars. And as of May 2018, both CalSTRS and CalPERS can only afford about 60% of the contributions promised to these pensions. Districts are faced with increased costs and budget cuts to education programs in order to fund these pension plans and make up for the billions in shortfall.
Takeaways
Learning about pension plans, especially those as specific but also widespread as CalSTRS and CalPERS, can be confusing. I’ve seen the looks on my clients’ faces when I dive into the details of these pension plans, only to realize I’ve failed to introduce the basics first! I realize that having a grasp on the most important and basic details of complex entities such as CalSTRS and CalPERS is just as crucial as grasping the intricate details. After all, having a basic understanding of anything is critical in moving forward!
As a California-based financial advisor, I deal with CalSTRS and CalPERS constantly, and I understand the importance of knowing not only the benefits of these plans, but also the issues surrounding them, such as the current deficits brought on by the pension crisis and 2008 market crash. I believe financial literacy is crucial for financial independence, which I want all my clients (and everyone else) to strive for! Hopefully, these facts give you a stronger understanding of the basics of the nation’s two largest pension funds, so you can continue to learn and grow your literacy.
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