Teacher Pension Plans

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Obviously, no one gets filthy rich on a teacher’s pension. Teachers aren’t lavishly paid, but each year of teaching comes with a significant promise toward a financially secure retirement. It is easy to underestimate the value of the pension system in the “big picture” of teacher compensation.

Teacher pay is better than it looks

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A teacher’s total pay is better than it looks. Teachers’ pensions in most states, including California, are “defined benefit” systems. That is, when a teacher retires, he or she receives payments in a manner defined by the rules of the pension system. Those rules involve factors beyond the amount he or she has paid in.

Most workers pay into Social Security. California government workers pay into CALPERS. California Teachers pay into CALSTRS.

The pension system for teachers is a “defined benefit” system, like Social Security. The amount you get out of a defined benefit system in retirement does not directly connect to the amount that you pay in. While working, you pay the system. When retired, the system pays you. The amount that the system pays out is determined by a formula that blends your pay when you retire, your age when you retire, and the number of years you work as a teacher or administrator in the STRS system.

It’s like Social Security for Teachers

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Teachers in California (and 14 other states, in whole or in part) don’t pay social security taxes or receive social security benefits. Instead, they pay into STRS. (STRS stands for “State Teacher Retirement System”. Everyone just pronounces it “stirs”.)

Superficially, STRS resembles Social Security. A portion of teachers’ gross wages is withheld from each paycheck. After retirement, they receive payments from the system. As with Social Security, teachers receive larger payments from the system if they retire older than if they retire younger.

There are differences. The Social Security system doesn’t differentiate the age at which you make your money, the kind of work you do or the number of years you have worked in a particular profession. These are central factors in the California STRS system because it has a particular mission: it is engineered to provide a strong pension for those who make teaching their life’s work. According to STRS, about half of California’s teachers stay in the profession at least 30 years.

In the private sector, many employees commit a portion of each paycheck to a personal retirement savings accounts such as an IRA or 401(k) account. This approach is known as a “defined contribution” model. Teachers can use defined contribution accounts, too, but the main pension system for teachers, the State Teachers Retirement System (STRS) is a defined benefit system.

The Newest Teachers Get 2% at 62

California’s teacher pension system has gone through significant changes over time. Recent policy changes tweaked the system in particular for teachers hired after Jan 1, 2014, who will retire decades from now. The new pension schedule for these young teachers is known as “2% at 62” because those who retire at age 62 receive an annual retirement benefit of 2% of the average of their last three years’ pay for each year they paid into the system.

Most Teachers Get 2% at 60

The pension system works a little differently for “Ava”, an imaginary freshly-minted teacher in Oakland Unified who began work the year before Bee. For teachers hired prior to Jan 1, 2014 (that is, most teachers in the system), the pension system is described as 2% at 60.

Many features of the system are similar for these two new teachers, but the vesting schedule is even more abrupt for Ava because of a bump in the 30th year of employment (known as the “Career Factor”).

Another difference between these systems for Ava vs. Bee is the definition of “Final Compensation” in the formula that determines how much each will receive in their monthly pension check.

For Ava, “Final Compensation” is defined as the amount of pay she earns in her final year of teaching. This produces a major incentive for her to boost her pay in her last year, if she can: One year of extra work for higher pay (at the school district’s expense) leads to bigger pension checks for decades (at the pension system’s expense). In extreme or fraudulent cases, this practice is known as pension spiking.

For Bee, “Final Compensation” is the average of her last three years’ pay. This provision was added to reduce the incentives to game the system.

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