Saturday, July 23, 2016

I May Never Get To Retire

In order to help make CalSTRS (teachers retirement system) solvent, a law passed a couple years ago required California teachers, districts, and (I think) the state all to contribute more towards teacher retirement.  Even before this occurred, California teachers were paying well above what they would into Social Security, with the understanding that they'd receive more than they would under social security in retirement.  We've been promised so much, though, that we're now having to pay more to get the same retirement we were promised.

CalSTRS wants us to believe the funding crisis has passed.  I'm not so sure:
Earlier this week, CalPERS—California’s pension fund for most public employees—reported abysmal annual earnings of 0.61 percent, a tiny fraction of the seven-and-a-half percent annual returns needed to keep it solvent over the long run. And its sister fund for teachers, CalSTRS, isn’t doing much better. The Wall Street Journal reports:
The nation’s second-largest public pension posted its slimmest returns since the 2008-2009 financial crisis because of heavy losses in stocks.

The California State Teachers’ Retirement System, or Calstrs, earned 1.4% for the fiscal year ended June 30, according to a Tuesday news release. The result is the lowest since a 25% loss in fiscal 2009 and well below Calstrs’ long-term investment target of 7.5%. Calstrs oversees retirement benefits for 896,000 teachers.
As Steven Malanga has noted, both of these union-managed funds are notorious for pulling political stunts even as they face gaping shortfalls, going on a misguided “green” investing binge that flushed taxpayer money down the drain, and pulling out of tobacco companies on moral grounds just before those stocks began to rise.
I retire in 12 more years, any bets on STRS' solvency then?


Mike Thiac said...

Darren, correct me if I'm wrong, but didn't your pension fund say they were going to be "socially responsible", invest in green energy, not in guns, etc?

Pseudotsuga said...

This must be a reason why there are so many job openings in California for teachers. Who'd apply knowing that (A) they couldn't afford to live anywhere in the "nice" parts of Cali, and (B) the pension they were hired for is non-existent?

Darren said...

Yes, that was mentioned in the link.

Anonymous said...

"I retire in 12 more years, any bets on STRS' solvency then?"

CalSTRS seems to have about 66% of the money that they need
to pay out. And are assuming around a 7% annualized return
on their investments. Bonds are returning 2% - 4% (depending
on how much risk you are willing to take ... you can get more
in Greek and Venezuelan bonds).

CalSTRS is going to need a lot of stock *AND* very good returns
of that stock going forward for this to work out. A big
recession and the fund is in even more trouble.

If this happens, future California taxpayers may be required to pay up.
Or your benefits might not be quite what you expected.

I wouldn't panic, but I'd have a plan to deal with not getting
100% of what I had been promised.

-Mark Roulo

Darren said...

My point is that my district, the state, and I are all paying *more* into STRS in order for me to get *less* than what I've been promised.

Ellen K said...

I could retire early next year. After more than 18 years teaching, the amount I would receive is so laughably small that I wonder if anyone in government has any relative who retires in the system. What is more, thanks to the Windfall Tax, what I had earned in social security in the years I wasn't teaching will be diminished because of TRS. I am so tired. I don't know if I can make it through this year much less next as well. I have reconciled myself to the sad fact that I will never retire-that while the affluent and the indigent can retire early to full benefits, I will be working until I literally drop dead. This is a stupid system. I could have put money into other vehicles that would have done far more for me economically than the jokes that is TRS. While coaches and administrators retire with lush incomes, most teachers I know are facing a very stark retirement if indeed they can retire at all. And the situation is even worse for those who came late to teaching.

Anonymous said...

"My point is that my district, the state, and I are all paying *more* into STRS in order for me to get *less* than what I've been promised."

Oh, yes. You may have been lied to.

The folks who made the promise didn't put enough into the plan to pay you. Non-government corporations (and probably unincorporated small businesses?) are not allowed to do this because of the Employee Retirement Income Security Act (ERISA), passed in 1974. Government pensions are *exempted* from this requirement to put in enough to pay the promised benefits. So many government pensions *don't* contribute enough to pay the promised pensions. See Detroit as an extreme example. Chicago and Illinois are getting close to this, too. California is behind them, but still in very bad shape.

So ... yeah, there isn't enough money in the kitty to pay you and all the other beneficiaries. Putting aside enough money would have made it obvious to the taxpayers what was being promised, and that might have screwed up various re-election plans.

Megan McArdle has a nice explanation of what has happened here:

In theory, unions should be leading the charge for more conservative accounting standards; after all, it is their job to make absolutely sure that their members will be able to count on those pensions in their old age. In practice, unions often have other priorities. Witness Detroit, where the unions did nothing to stop the absolutely grotesque mismanagement of the city's pension funds.

In New York, reports the Times, the unions don't want to move to more conservative pension accounting, because if they do, the city will be required to put more money into the pot . . . and the taxpaying public might mobilize against the union workers who put them in this spot.

Of course, putting it off will ultimately just make the problem worse; the inexorable logic of compounding is just not very forgiving. Over the next few decades, we are going to come face to face with more problems like Detroit's: pensions that must be paid, legally and morally, but cannot be paid while still offering an acceptable level of government services. Taxpayers' wallets are not an inexhaustible resource, and cities and states that demand too much will see their citizenry depart for more fiscally responsible climes.

The problem is that at any given time, it always looks better to delay -- and the worse a crisis gets, the more attractive a delay looks, because the reckoning is already very painful. New York's new mayor has so far said little about the city's pensions, and it's probably in his best political interest to keep mum. It's too bad that the interests of future pensioners -- and the city's -- are so different.

Sorry about that.

-Mark Roulo

Anonymous said...

The projected magnitude of the shortfall facing CalSTRS (and CalPERS) depends entirely upon the assumed rate of return that underlies all these projections.

I'm not a CPA, but as I understand it, the 7.5% assumed rate of return-- technically, the proper term is "discount rate"-- that is used by CalSTRS is widely regarded as unreasonable. It is a fiction that is presented to a largely innumerate group of beneficiaries. It has been documented that CalPERS uses a much more conservative discount rate of 3.8% for departing member organizations (when they depart, they have to provide funding to cover projected liabilities, and the growth rate that is assumed for those funds is 3.8%); for corporate pensions, the discount rate is 4% to 5% (AT&T uses 4.2%, for example), and Moody's uses 5% when they construct a rating of the creditworthiness of an entity.

CalSTRS quietly admits that the funding shortfall would be much larger with a different discount rate assumption. On page 57 of their 2014-2015 Annual Report, they provide the following figures:

Discount rate: 7.6%, the funding shortfall is $67.3 Billion;
Discount rate: 6.6%, the funding shortfall is $101.7 Billion;
Discount rate: 5.6%, the funding shortfall is $143.4 Billion;
Discount rate: 4.6%, the funding shortfall is $194.3 Billion.

For someone retiring in 10-15 years, I think it is unlikely that their pension benefits will get much of a haircut. CalSTRS does depend on investment returns for a large amount of their cashflow-- about a decade ago, before the crash, I heard Jack Ehnes state that they depend on investment returns for 75% of their cashflow, and I can't see how that figure would go down-- so I suppose that a decade of returns below the needed 7.5% figure *could* impact benefits, but I don't know where the tipping point is.

For someone retiring later, I would expect it becomes increasingly likely that there will be a haircut of their promised benefits. How much? Hard to say. The people of California keep electing Democrats, and as we well know, the government that robs Peter to pay Paul can always count on the support of Paul. However, even with the Democrat/lamestream media alliance, at some point it's going to start making people angry when they realize that their largesse from the treasury is being threatened by the largesse that was promised to past employees of the state in all their forms. The state can't declare bankruptcy, nor can they print money, so there will be a reckoning, and the sheer collective magnitude of the funding shortfalls is such that the can can't be kicked down the road perpetually.

My guess is that there will come a time where California pols will "make sausage," and craft some kind of political solution that makes everyone angry: teachers, cops, firemen, citizens, everyone. I hope you all are saving your own money for retirement purposes.

I had a very sobering conversation with a financial planner at Vanguard last year. I'm around 50, and my wife and I have saved independently and somewhat diligently for our retirement for about 20 years. We have a net worth in the low seven figure range. I gave him all our financial details and asked him to use his cashflow projection software to predict the probability that I could retire at age 65 with 100% of my cashflow. The answer: not likely. Long story short, our plan now is that I will retire in about 20 years (around age 70), with about 2/3 of my current cashflow, including what I hope to get from CalSTRS, where I have more than 20 years of service credit already, and a Defined Benefit Supplement account balance that exceeds my Defined Benefit account balance.

Anonymous said...

The writing is on the wall... I wouldn't be surprised at all to read similar headlines regarding California sometime down the road.

I thought the most interesting quote from the article was this one:

"“This is the reality we are living in,” Mr. Ingram said, noting that the pension fund has not received actuarially adequate contributions from the state for 70 years."

But in that bluest of blue states, the unions still do what they can to keep it blue. I wonder how they will respond when their pension benefits are significantly cut?