The two main reasons this has occurred are actuarial miscalculations and underperforming investment returns.
Since at least the early 1990s, STRS outside actuaries have introduced the importance of "Intergenerational Equity" at Board Meetings. Conceptually, all retirees should receive the benefits they earned and paid for throughout their careers, and STRS retirement benefits should be similar for all retirees.
The 'Entry Age Normal' system, used by the STRS actuary, plays a crucial role in determining the NORMAL COST for all employees throughout their careers. Until the pension changes in 2013, the NORMAL COST was consistently around 14.75% to 15.25% yearly. However, since the “pension reform,” the NORMAL COST has been just under 11% for around a decade. This means that current teachers are paying 14% for a retirement benefit worth less than 11%, highlighting the disparity in contributions and benefits.
STRS has failed in its mission to provide "Intergenerational Equity." The two main reasons this has occurred are actuarial miscalculations and underperforming investment returns. Since STRS documents show that the original 3% COLA was supposedly funded at each member's retirement, and then to have that critical component removed, we must place the blame where it belongs. Some of this could be the fault of the actuary, possibly when Sub. Sen. Bill 190 raised formulas, made career longevity enhancements, etc., but the overwhelming blame must be put on the investment team's and their advisors' performance.
Intergenerational Equity: Remember 30 and out?
Remember 30 and out? Let’s compare the current pension income of 1992 retirees with our recent 2022 retirees. Clearly, 30 years apart qualifies as an entire generation. Teachers used to be able to retire after 30 years of service, so let’s examine the intergenerational equity, or inequity, of the two groups.
A typical 1992 STRS retiree had an FAS of only $43,500, with a 63% formula for 30 years of service. This person began with an annual pension of $27,405 and now receives an annual pension of $46,585. This is less than it should be due to the 2012 “pension reform,” which reduced the 3% COLA by a third and, since 2017, has only yielded two ad-hoc formula increases for a total of 25 years of COLA out of 32 years. There were seven years without COLA's. Still, these retirees are behind by over 24% of their original pension purchasing power.
Today's 2022 STRS retiree, with a final average salary (FAS) of $80,000, more than 70% greater than the 1992 retiree, can be worse off due to “pension reforms.” If they retired at 30 years, their FAS provided only a 33% pension formula, and they statutorily will not receive COLAs for 5 years. They will receive the same annual $26,400 pension they started with over this period without any promises of a future COLA.
Meanwhile, the 1992 Retiree pensioners are paid $46,585 per year. They received a 3% COLA in 2023 and a 1% COLA in 2024. A pension plan without any inflation protection fails to be a pension plan.
Below is the simplified overview of the “pension reform plan” approved by legislators overseeing STRS Management.
Withhold the promised 3% of COLAs until 21 billion dollars are saved.
Implement an overly penalizing structure for retirement, where 30 years of service, which used to provide 66% of FAS, became reduced to 33% by August of 2021.
Force people to work a minimum of 4 more years for an unreduced pension. This saves STRS $210,000 per retiree.
Increase the Employee Contribution from 10% to 14% without increasing the Employer Contribution.
Is there any reason to doubt why the Public Plans Data - Center for Retirement Research at Boston College ranks STRS as the only pension plan in the US with a negative "Normal Cost?"
Bob Buerkle Dean Dennis
July 23, 2024