CalSTRS CEO Jack Ehnes Recommends 50% Increase to CalSTRS Pension Benefits

“The median CalSTRS pension replaced less than 60 percent of final salary for the members who retired last year. CalSTRS recommends income replacement of 80 percent to 90 percent to maintain a similar lifestyle in retirement. Public educators do not receive Social Security benefits for their CalSTRS service.”
– Jack Ehnes, Chief Executive Officer, CalSTRS, Introduction to CalSTRS Comprehensive Annual Financial Report 2014, page 11)

Here we go again – a recommendation for another 50% pension benefit increase. Will it be retroactive this time? That went well last time. Remember SB 400, quietly passed for CHP officers during a robust bull market in 1999, and by 2005 rolled out to nearly every state/local agency in California? No consequences whatsoever.

And, here we go again – somehow getting a CalSTRS pension instead of Social Security is a monstrous sacrifice!

Social Security recipients making roughly what veteran teachers make can expect to receive a benefit at age 68 that is roughly equivalent to 25% of their final year’s earnings. Twenty-five percent. The average teacher receives 2.5 times that much each year via their pension, starting about seven years earlier. Mr. Ehnes thinks that’s not enough. He ought to know better. If every Californian retiree got a pension equivalent to what a CalSTRS recipient currently gets, it would cost over $600 billion per year. Where’s that money going to come from, Mr. Ehnes?

There’s a lot to chew on for anyone trying to wade through CalSTRS most recent publicly available annual financial report. This additional gem, also coming from Mr. Ehnes himself, illustrates just how out of touch the pension bureaucrats have become:

“The funding approach in AB 1469 is predicated on the actuarial assumption that CalSTRS will earn a 7.5 percent annual rate of return throughout the life of the plan.” (CalSTRS 2014 CAFR, page 8)

Jack Ehnes is referring to California Assembly Bill 1469, passed in May 2014, which will phase in massive contribution rate increases over the next several years, mostly from taxpayers, so that CalSTRS will be fully funded by around 2047. That is, in exchange for even higher contributions from taxpayers, CalSTRS will get its financial house in order “in about 32 years.”

But what if “throughout the life of the plan,” CalSTRS is unable to earn a 7.5 percent annual rate of return? Does it matter at all that recently reported gains were logged during this latest bull market that’s running out of steam? Will even more massive contribution rate increases be the solution? According to the most recent data available, CalPERS is currently $73 billion in the hole, or only 67% funded. (CalSTRS 2014 CAFR, page 158)

The problem with seasoned financial professionals like Jack Ehnes fostering expectations like this – bull market returns of 7.5% for the next 32 years, and pensions for teachers that need to elevate from the current 60% of salary to “80 per cent to 90 percent” of salary, is that people who aren’t financial professionals actually believe them.

From professional government union supported PR firms, to the rank-and-file workers they assist to prepare op-eds, unrealistic expectations from people like Jack Ehnes are packaged into propaganda designed to destroy public support for pension reform.

For an example of this, look no further than the August 22 guest op-ed in the Sacramento Bee, “Another View: State pension funds are recovering,” purportedly written by Lydia Petitjean, a public school secretary and CSEA union official. Pettijean’s lead sentence is pure propaganda:

“Perhaps an oil slick is clouding the crystal ball of Stephen Eide of the Koch brothers-funded Manhattan Institute when he suggests that the effort to undermine the retirement security of millions of Californians – disguised as ‘pension reform’ – is gaining steam.”

This is sophomoric trash talk. It is vacuous, cynical drivel. The Manhattan Institute is a respected organization, Stephen Eide is a policy analyst with unimpeachable integrity and proven financial acumen, the Koch Bros have little if anything to do with the Manhattan Institute, and “oil slicks” is an image calculated to elicit disgust, but has nothing to do with pension reform. Nothing.

Anti-reformers like Lydia Petitjean base much of their rhetoric on a false premise – that big moneyed “Wall Street” special interests would like get their hands on all that pension money. This is patently false. As it is, the finance industry benefits immensely from government pension funds, because they have an enormous amount of money already invested on Wall Street – $4.0 trillion in assets nationwide. The pension funds relentlessly advocate, and then manage, benefit plans so generous that they are forced to invest in high-risk, high-return financial instruments that the financial industry is all to happy to invent and sell to them. Even better, when they don’t hit their numbers, the taxpayers bail them out. And even if every government worker’s defined benefit plan was converted to a 401K tomorrow, the same pension systems, CalSTRS and CalPERS and all the rest, would still be the administrators.

There’s nothing there, Ms. Petitjean. Not even “oil slicks.”

The reality is maybe pension reformers just want to prevent the pension systems and their government union allies from running every city and county in California into the ground.

Sooner or later, if public employees hope to keep their defined benefit pensions, they will have to accept lower benefit formulas. When the next market downturn hits, and it will, people like Jack Ehnes will have a lot of explaining to do, and people like Lydia Petitjean will have to make a tough decision:

Do they want to become oppressors of the private sector taxpayer in partnership with some of the most aggressive financial predators in the world, so they can enjoy retirement benefits several times better than Social Security recipients? Or do they want to share the same economic challenges as the people they supposedly serve, and work towards feasible solutions to retirement security in America for everyone?

UnionWatch-logo

*This article first published on Union Watch, a project of the California Policy Center

====================================================

Ed Ring is the executive director of the California Policy Center.

The mission of the California Policy Center is to secure a more prosperous future for all Californians.

CALIFORNIA POLICY CENTER PENSION STUDIESCalifornia City Pension Burdens, February 2015

Estimating America’s Total Unfunded State and Local Government Pension Liability, September 2014

Evaluating Total Unfunded Public Employee Retirement Liabilities in 20 California Counties, May 2014

Evaluating Public Safety Pensions in California, April 25, 2014

How Much Do CalSTRS Retirees Really Make?, March 2014

Comparing CalSTRS Pensions to Social Security Retirement Benefits, February 27, 2014

How Much Do CalPERS Retirees Really Make?, February 2014

Sonoma County’s Pension Crisis – Analysis and Recommendations, January 2014

Are Annual Contributions Into CalSTRS Adequate?, November 2013

Are Annual Contributions Into Orange County’s Employee Pension Plan Adequate?, August 2013

A Method to Estimate the Pension Contribution and Pension Liability for Your City or County, July 2013

Moody’s Final Adopted Adjustments of Government Pension Data, June 2013

How Lower Earnings Will Impact California’s Total Unfunded Pension Liability, February 2013

The Impact of Moody’s Proposed Changes in Analyzing Government Pension Data, January 2013

A Pension Analysis Tool for Everyone, April 2012

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S Moderation Douglas
S Moderation Douglas
5 years ago

Gracias.

Citizen Reporter
Admin
5 years ago

We republish Ed Ring’s subsequent comments on their “Union Watch” site:

Ed Ring says:
August 26, 2015 at 9:31 AM
When reviewing the CalSTRS CAFR, Mr. Ehne’s remarks in particular, it wasn’t immediately clear that he was not advocating a further increase to the CalSTRS pension benefit to achieve “income replacement of 80 percent to 90 percent.” Upon further review, it appears unlikely that was the intent of his remarks. I apologize for probably misinterpreting his remarks.

The difficulty with being entirely accurate when reading anything coming from a pension bureaucrat, a government union official, or any of their puppets, is that nothing surprises us anymore.

Why is Ehnes even talking about an “80 percent to 90 percent” income retention in retirement, when private sector workers are forced to pay into Social Security – contributing 12.4% of an independent contractor’s gross income, in exchange for only 25% of their final salary? Teachers, even under the new rules, will NOT be contributing anywhere close to 12.4% of their salary via withholding, as independent contractors must with their total earnings. CalSTRS withholding contributions are moving, in general, from around 8.25% to 10.25% – correct me if I’m wrong.

Using normal investment assumptions, the differential, by the way, between a salaried private employee’s 6.2% withholding and a teacher’s 8.25% withholding does NOT translate into a retirement annuity that is 2.5 times greater and is awarded 6 years sooner – read this to see the calculations:
http://californiapolicycenter.org/comparing-calstrs-to-social-security/

Why does Ehne’s think it is the business of CalSTRS to facilitate income replacement of “80 percent to 90% percent” of final salary when his remarks will be correctly interpreted to justify agitation for higher teacher pay, presumably so they can save more on their own, when the greater problem of private sector taxpayer’s retirement security remains ignored?

And as an aside – why is teacher pay entirely decoupled from teacher performance?

And since when should anyone be required to collect more than 60% of their “final salary” in retirement? In the real world, we pay off our home mortgage, eliminate other debt, and live reasonably well if we’re lucky enough to still collect 60% of our “final salary.”

Why is Ehne’s even talking about “final salary” when in the Social Security benefit formulas, lifetime average salary is what governs benefit accrual, as it should?

When are people like Ehnes going to understand that 7.5% returns are not “risk free,” and if they are “risk free,” maybe taxpayers should not have to bail out the pension funds anymore to keep them adequately funded.

These realities are insulting. The mentality of anti-reformers is insulting. Their sense of entitlement is insulting. Their complete lack of empathy for private sector taxpayers is insulting. Their selective understanding of economics and finance is insulting. Their blithe, continual use of distortions, deceit, lies and misrepresentations is insulting. We don’t want to be like them, and we’re not.

Another aside: Our organization does not advocate eliminating defined benefits, unlike many reformers. We advocate lowering the rate of return assumption, raising the retirement age, lowering the annual accrual multiple, increasing the employee contributions, establishing benefit ceilings, and ending the risky investment strategies. Some of this is consistent with incremental progress already made – but what’s been done so far is not nearly enough. We also believe all public employees should be participants in Social Security. The progressive nature of Social Security benefit formulas, wherein high income participants get less back as a percent of lifetime earnings than low income participants, means that the highly paid public employees would financially rescue Social Security. Let’s do that tomorrow.

I apologize for misinterpreting Jack Ehne’s remarks – which it appears I did.

The many anti-reformers who pounced on my remarks this time are invited to find any additional mistakes in my work, or the work of this center. You may find another one or two, among the many thousands of posts and studies we’ve published, because there is no media source or research institution, anywhere, that is infallible. But mistakes we make are not intentional. When we work with our researchers, we urge them to use assumptions that are as conservative and defensible as possible. There is no need to spin the numbers or the explanations of what they mean.

Overly generous, financially unsustainable public sector pensions are the biggest financial betrayal by government of the average private citizen in the last fifty years. They undermine the very legitimacy of government, as state and local agencies everywhere pass onerous laws and regulations designed to raise revenue at all costs. As they are, public sector pension funds are not financially sustainable. They are going to wreak havoc.

In the title of this post I have probably misinterpreted Jack Ehnes’ remark, and I am sorry. But I stand by every other word.

S Moderation Douglas
S Moderation Douglas
5 years ago

Jack Ehnes didn’t actually recommend a 50% increase to CalSTRS Pension Benefits. Read the remarks in the original Unionwatch story.

Ed Ring corrected and apologized for the misstatement.

Citizen Reporter
Admin
5 years ago

Thanks Douglas. We replicated Mr. Ring’s comments to that effect. We encourage our readers to access Mr. Ring’s original posting and view/participate in the very lively reader debate therein http://unionwatch.org/calstrs-ceo-jack-ehnes-recommends-50-increase-to-calstrs-pension-benefits/