A few days ago, I saw a tweet that led me to read a CBS article Calif. commish advises teachers give up pensions. The article suggested that the state could no longer afford to pay out on its pension obligations and that changes would have to come. It went on to say that after teaching 35 years, a teacher could expect to get 80% of her salary as a pension each year. Wow! Sign me up, who gets a pension like that in this day and age?

Wait a second. There’s one not-so-minor detail the article conveniently overlooked. These teachers are not in the Social Security system. Another minor oversight – according to a CALSTRS (California State Teachers’ Retirement System) report the teachers still pay in 8% per year of their own money to their pension plan. Now, forgive me, but it’s time to do a little math. In the normal system, one’s employer pays in 6.2% of the employee’s salary to Social Security. Companies’ average 401(k) match is about 3%, but for sake of round numbers let’s assume California puts in a total 8% even, just matching the 8% coming out of the teacher’s pay. So we have 16% per year saved. I pull up a spreadsheet, which will adjust for inflation right till retirement, and enter 16% as the percent saved, a 3% inflation rate, and just an 8% return each year. (Note – Dave Ramsey says I can enter 12% rate of return, but I’ll stick with the 8%) After 35 years, we have 14 times the last year’s income as the amount saved in the retirement account. At 55, an immediate annuity will return 5.82% for a woman (more for a man, we don’t live as long) and to finish the math 14 x 5.82% is…… drumroll…. .816 or 81.6% of final income. No smoke, no mirrors, and just a lousy 1.8% match. My employer gives us 5%, many give more.

What’s ironic to me is that if new teachers simply got this 16% deposited to a private account there’s a great chance they’d actually come out ahead of that 80% income replacement. It comes down to a question of defined benefit vs defined contribution, who will take on the risk? But reflect carefully on the numbers, these teachers aren’t getting a windfall, not by a longshot. Perhaps the author of the CBS article should get, as Paul Harvey says, “The rest of the story.”

I know you know how I feel about the subject but what makes defined benefit systems so amazing to me (AND unsustainable at current levels):

1) The payment never stops. Even at your numbers if spending stays the same you can run out of money, and be done with it Not with the pension

AND

2) It doesn’t matter if you retired in 2000 or 2007 your payment is guaranteed.