Wednesday, January 21, 2009

Myths About Defined Benefit Plans

California's teachers do not pay into social security. Rather, we pay a higher percentage of our pay into CalSTRS, the State Teachers Retirement System. It, like social security, is a "defined benefit" plan, meaning that what we pay into it has only the slightest bearing on what we might get out of it in retirement; our benefit is defined by a formula. This is different from a 401(k) plan, wherein the amount you receive in retirement is based on how much you paid in and how much your investments increased.

Today I received the Winter 2008 newsletter from CalSTRS, and boy, is it a whopper! The first headline is "Study Busts Myth About Cost Burden of Defined Benefit Plans: Your Pension is Well-Managed and Efficient". While that's nice to hear, nowhere does it say how much value CalSTRS has lost due to bad investments and the market downturn. Here are some of the key sentences that just jumped out at me:

*Defined benefits, like yours with CalSTRS, can deliver the same level of retirement income to groups of employees at a lower cost than individual 401(k)-type accounts.
*Public Pensions Unfairly Blamed for Financial Woes
*...(D)efined benefit pension plans are better, more economical, and efficient.
*Remember, your defined benefit is safe. It's mandated by law and guaranteed for your lifetime. Your pension is based on a formula, not on how much you've been able to invest as an individual.

Uh, I ask again, how much money has CalSTRS lost lately? You say this is efficient, and I like the security of this pension, but might someone not in CalSTRS view this situation as a potential budget black hole?

This newsletter strikes me as the captain of the Titanic telling everyone that everything's fine. It doesn't offer any real facts. I am not reassured.


jeffsters said...

Nothing to see here, move along now. And ignore all of that red behind the curtain...

Anonymous said...

The other day I received a mailer from CalPERS that basically downplayed their recent losses. Unfortunately, they don't really provide a complete picture of their operations. From outside sources some of the details are filled in, and they aren't pretty.