1. Are California Teachers Better off with a Pension or a 401(k)?
Nari Rhee, PhD
UC Berkeley Center for Labor Research and Education
NCTR/NIRS Webinar
February 9, 2016

2. Purpose of Study
Evaluate suitability of CalSTRS pension benefits for California teachers—given turnover & tenure patterns—compared to alternative plans
Defined Contribution (DC), e.g., 401(k)
Cash Balance (CB) plan

3. Key Findings

4. 1) Most classroom teaching in CA is performed by long-career teachers who are well-positioned to benefit from a traditional pension.
3 out of 4 current teachers will retire with at least 20 years of service*.
About 1/2 will retire with at least 30 years.
Median age at exit: 61, with 29 years of service.
* FT and PT treated equally for service year calculation purposes

5. 2) For the vast majority of California teachers (6 out of 7), the CalSTRS defined benefit pension provides greater, more secure retirement income compared to a 401(k)-style plan.
4 out of 5 (79%) better off compared to a generous Cash Balance Plan.

6. Driving Factors Low system-wide turnover
Low turnover/attrition between vesting and early retirement age

7. Despite High Early Career Turnover, Low Overall Turnover in CalSTRS
~6% CalSTRS systemwide turnover
Some teacher mobility offset by portability of CalSTRS benefits
across the largest public education labor market in the US.
up the career ladder (teacher  principal/administrator).
Turnover concentrated in key moments of career

8. Attrition Is Concentrated in First 5 Years After Hire

9. Between Vesting and Retirement Age, Teacher Turnover Rates Are Extremely Low

10. Vast Majority of CA Teachers Will Stay Past Early Retirement Age

11. When Tenure Is Considered in Tandem with Benefit Accrual Patterns, Vast Majority of CA Teachers Are Better off with CalSTRS Pension

12. Switching to Account-Based Plans May Have Adverse Consequences
Significantly higher benefits (in retirement income terms) for those who leave soon after hire, compared to teachers who stay in CA for the long haul.
Workforce implications:
Increase overall turnover.
Decrease incentive for mid-career teachers to stay.
Make it harder for older teachers to retire.
Significantly lower retirement incomes for most teachers.

13. Methodology
Project final tenure and exit age for current California teaching workforce, based on CalSTRS active membership data and actuarial assumptions.
Rigorous modeling of alternative benefits (DC and CB) for comparison with CalSTRS DB; identify cross-over points when DB exceeds alternative plans.
Estimate % of CA teachers who are better off with CalSTRS pension vs alternative plans, based on projected exit age and years of service.
*In this study, “tenure” refers to number of years served at separation.

14. Modeling Three Plans CalSTRS DB Pension Defined Contribution
Reduced benefit tier - 62
Benefit projections from CalSTRS/Milliman
CalSTRS DB Pension
Invested in low-cost Target Date Fund
Generous 5% annuity rate
Defined Contribution
Generous 7% crediting rate
Generous 7% annuity rate
Cash Balance

15. Core Assumptions Contribute 14.42% of pay
Includes 9.205% EE contribution
current PEPRA rate for retirement & withdrawal benefits
Retirement benefits start age 60
if teacher leaves later, start immediately.
Uniform economic assumptions (salary growth, inflation)
All benefits taken as a life annuity
2% simple COLA, same as CalSTRS pension

16. Constructing an Apples-to Apples Comparison
CalSTRS DB DC CB
Initial Benefit Calculation
Identify maximum available benefit at each possible separation age:
EE contribution refund
lump sum cashout
retirement benefit
Based on geometric mean investment returns for typical Target Date Fund
w/ .25% annual fee
7% annual interest
Retirement Income
CalSTRS projected monthly benefit for retirement
Refunds/cash-outs: assume invested in DC plan
5% interest
7% interest
Value of Benefit
DC balance required to fund same income stream
Account balance

20. Identify Age When CalSTRS Pension Surpasses Alternative Plans
DB exceeds DC at age 51 or later
DB exceeds CB at age 56 or later

21. When Tenure Patterns Are Considered, Vast Majority of CA Teachers Are Better off with CalSTRS Pension

22. Problems with Studies Asserting “Most Teachers” Are Better off with DC or CB*
Rely heavily on turnover rates among entering teachers, but ignore the career patterns of teachers who are actually working today.
Thus, findings don’t represent what most policymakers, students, and parents would consider to be the teaching workforce.
Lax modeling of alternative benefits for comparison purposes
Fail to account for differences across plan types in how asset values translate into income.
*Examples: Urban Institute 2014, Manhattan Institute 2013

23. False Logic that Because DB is Backloaded, DC is Better
Critics focus on disparity between teachers based on when they leave.
Even so, the CalSTRS pension provides higher retirement income than DC for most teachers.

25. Break-Even Point on Employee Contributions to CalSTRS
25 year old hires break even at age 43 compared to idealized DC plan, and 38 compared to realistic DC plan.
This assumes teachers place no value on DB guarantee during accumulation phase.

26. Impact of 401(k) Volatility on Benefit Comparison
1 in 4 chance of DC benefit less than guaranteed DB
Guaranteed DB far exceeds projected DC for this teacher