The Teachers' Retirement Board is committed to a comprehensive strategy to address the long-term funding gap. CalSTRS funding shortfall is $64.5 billion as of June 30, 2011. This is the projected shortfall of the amount of income needed to pay current benefits owed for service performed.
A comprehensive, long-term solution is needed to address the long-term problem. Therefore, the Teachers' Retirement Board is working with stakeholders on several fronts. See CalSTRSbenefits.us for up-to-date information on the funding strategy.
Current Benefits Will Be Maintained
On average, California's career educators receive about 60 to 65 percent of their final salary in retirement and do not earn Social Security for CalSTRS service. Most rely on CalSTRS Defined Benefit as their guaranteed source of retirement security.
Benefits and contribution rates are unchanged as educators, school employers, the California Legislature and CalSTRS develop a plan to deal with the funding challenges.
Working together, the funding shortfall is solvable. CalSTRS believes gradual, predictable increases in contribution rates can be achieved.
Tactics for Success
- Education effort underway to build understanding and support for a solution.
- Collaborate with stakeholders, the governor and Legislature.
- Seek legislative approval to increase contributions rates within limits.
- An incremental and phased approach is needed to address the funding gap.
Financial Turmoil Affects Funding Gap
Since 2006, CalSTRS has communicated to members, employers and the Legislature about the projected funding shortfall or unfunded actuarial obligation (UAO). The shortfall is based on an actuarial valuation, which is a snapshot of the fund's assets and liabilities.
CalSTRS assets must balance with cost of future benefits over the long term to pay the pension promise to all generations of teachers. Based on current projections, CalSTRS has assets to pay benefits through the early 2040s. If there is no change to contribution levels, the state as plan sponsor would be obligated to fund benefits on a pay-as-you-go basis.
CalSTRS funding level has fluctuated over 98 years. Historically, investment returns have contributed about 60 percent of the retirement benefit. The 2008 world economic turmoil and the 2001 dot com bust created lower than expected investment returns. Contribution rates for members have not changed in nearly 40 years.
The recent economic downturn confirms that relying on investment returns alone is not a viable strategy to reducing the gap. The significant financial losses CalSTRS experienced during the global economic downturn make it unreasonable to assume that future investments will be enough to eliminate the unfunded liability. Reasonable and predictable contribution rates will need to be increased to offset the impact of investment losses. While members' retirement benefits won't change as a result of the downturn; the longer we wait to address the gap, the higher the cost.
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