Monday, February 28, 2011

Retired California Teachers Receive Lump Sums of $500,000

Oh, those poor, poor California teachers. They only get lump sums of $500,000 when they retire. Wait, what? Oh, you didn't know that? Keep reading.

"Of the 12,568 California educators who retired in fiscal year 2007-08, the median number of years on the job was 29 years. The average CalSTRS pension was $48,180 per year, which was about 62 percent of the average highest salary." See here.

Assuming a 6% rate of return and 29 years of retirement, you and I would have to save up almost $17,200 every single year for 29 years straight to get the same level of retirement income as an average California teacher. Why? Because most of us would have to buy an annuity on the open market to get something similar to a pension.

To give you an idea of just how expensive these pensions are, let's do the math: to get $48K a year for 17 years, we would have to save up a nest egg of about $500,000. Basically, California taxpayers provide the average California teacher with a nest egg of $500,000 upon retirement--which is the market cost of paying someone about $48K a year for 17 years of retirement (e.g., hypo assumes you start teaching at the age of 31, and work 29 years, which means you're 60 years old. You then retire and then expire at 77).

Will most Californians have at least $500,000 when they retire? If not, why are they responsible for guaranteeing the average teacher an annuity worth $500,000? Also, how many of us can afford to save $17,200 a year? Even if private sector employees maxed out their 401(k)s, they couldn't put $17,200 a year in the account. And people still think teachers, on average, are underpaid. Perhaps the newer and younger ones are--but that's not the taxpayers' fault. It's the union's fault for creating and enforcing a compensation system that shoves so many available taxpayer dollars in the back-end of a teacher's career rather than in the front.

P.S. Want to do the annuity calculations yourself? Here is one version of an annuity calculator.

Bonus: Actually it looks like I may have underestimated the value of the pension. More here
. The Money Blog calculates that as of 3/2011, a $300,000 lump sum would would get you just $1300/mo in annuity payments.

Also, see Margaret Collins, July 1, 2011, “Delay Taking Social Security, Add Annuity to Survive Retirement”: “For example, a contract [annuity] purchased for $95,500 by a 66-year-old couple in Florida may provide $4,262 a year until the death of the surviving spouse and include increases for inflation."

Bonus II:
from Joel Klein, The Atlantic, June 2011:

[C]onsider the financial burden that comes with providing lifetime benefits. Given the time between first putting aside the money to fund such a “long-tail exposure” and having to begin paying it, the amount “reserved” by the employer necessarily depends on a host of imprecise assumptions—about the rate of return that the money invested in the pension fund will earn, about how long employees will live, and even about how much overtime employees will work during their last few years, which is normally included in calculations of the amount of the pension. Each dollar set aside this year to cover the ultimate pension exposure must be taken from what would otherwise be current operating dollars.

Consequently, elected officials have had every incentive to make extraordinarily optimistic assumptions about the pension plan—or to simply underfund it—so they can put as little as possible into the reserve. Unfortunately, but predictably, that’s exactly what has happened: most states “assumed” they would get an average 8 percent return on their pension reserves, when in fact they were getting significantly less. Over the past 10 years, for example, New York City’s pension funds earned an average of just 2.5 percent. Now virtually every pension plan in America that covers teachers has huge unfunded liabilities. A recent study by the Manhattan Institute estimated the total current shortfall at close to $1 trillion. There’s only one way to pay for that: take the money from current and future operating budgets, robbing today’s children to pay tomorrow’s pensions.

2 comments:

A said...

P.P.P.S....

You also omitted the fact that teachers and other state employees often have to make MONTHLY CONTRIBUTIONS TO THEIR RETIREMENT PLAN... OFTEN AMOUNTING TO HUNDREDS OF THOUSANDS OF DOLLARS over the course of the decades of employment...

K_Yew said...

@A: your numbers, much like the teachers' pension plans, don't add up.

First, the current contribution formula requires inadequate contributions from teachers. As a result, their pension plan is basically insolvent. Without major changes, taxpayers appear to be on the hook for yet another bailout.

See here: http://globaleconomicanalysis.blogspot.com/2011/02/calstrs-california-state-teachers.html

Second, as I've shown in the article, after 29 years of work, the average California teacher receives a benefit worth around $500,000.

Generally speaking, California teachers contribute just 8% of their salaries and gain access to a pension after just five years of work.

California teachers averaged $67,531/yr in 2009-10. See http://www.ed-data.org/fiscal/TeacherSalary.asp?tab=0&level=06&ReportNumber=4096&County=43&fyr=0910&District=69393

8% of $67,531 is $5,402 per year. Multiply that by 29 years, and a teacher has contributed about $156K for a benefit that is worth about three times as much.

Perhaps you are correct in arguing that the real amount given to high earning teachers upon retirement is somewhere between $300,000 and $350,000, not $500,000. However, I would argue that peace of mind--where a high rate of return is guaranteed by the state regardless of the performance of the stock market--is worth at least $5,400/yr. After all, most Americans in the private sector cannot afford to max out their Roth IRAs, and even if they do, they must rely on an ever-increasing stock market for their retirement. Certainly no one is guaranteeing them an 8% average annual return over 29 years.

In any case, an average teacher would contribute a total of $156,658 over 29 years, not "hundreds of thousands of dollars" as you falsely state.