California Educator

MAY 2010

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under intense scrutiny and unwarranted attack by legis- lators and candidates alike. Much of t he t alk has been centered around the sustain- abi lity o f def ined-benefit retirement pensions, such as CalPERS and CalSTRS. S teve Poizner a nd Meg Attacks on defined-benefit retirement plans increasing A hot topic of discussion of late, public pension systems h ave b een plan saves almost half the cost of a def ined-contribution plan (see sidebar). Historically, defined-bene- Whitman — both running for governor of California — are becoming increasingly vocal in t heir o pposition t o de- fined-benefit plans, arguing a need to switch public employ- ees f rom their c urrent de- fined-benefit retirement plans to 401(k)-type defined-con- tribution plans. The candi- dates claim that the switch to 401(k) systems would be more cost-effective for the state. But in actuality, the reverse is true. To deliver the same level of retirement benefits to an individual — a decent, livable wage — a def ined-benefit fit plans are much more effi- cient, secure and predictable vehicles of retirement than 401(k) co ntribution plans. Defined-benefit systems are able to pool resources to max- imize in vestment r eturns, while def ined-contribution plans leave individuals bur- dened with admini strative fees and many hidden costs. Research shows that many in- dividuals struggle with the task o f m anaging m oney through a 401(k), either draw- ing down funds too quickly and running out of money, or holding on to funds too tight- ly and enjoying a lower stan- dard of living as a result. Gov. Arnold Schwarzeneg- ger recently took sides in the debate through the actions of his economic adviser, David Crane, who commissioned a study conducted by students Defined-benefit plans are more cost-effective The cost of a defined-benefit plan is 46 percent lower than a defined-contribution plan that provides the same level of retirement benefits. Longevity risk pooling saves 15% Maintenance of balanced portfolio diversification Superior investment returns saves 5% saves 26% Source: “A Better Bang for the Buck: ˜ e Economic E° ciencies of Deÿ ned-beneÿ t Pension Plans” by Beth Almeida and William B. Fornia, FSA — 2008. at Stanford University that calls for a switch of public employee pensions from a de- fined-benefit plan to a 401(k) plan. The study throws away decades of investment and ac- counting practices, and con- cludes that the rate of return assumptions for California’s pension systems should be close to 4 percent — almost half of their current levels, which have b een ac hieved over time, despite the eco- nomic downturn. The real purpose of the study is to create an alarmist perspective that running a de- fined-benefit plan is simply too costly and must be elimi- nated in favor of a defined- contribution plan. The gover- nor should be seeking ways to ensure that all Californians have a secure retirement. Instead of commissioning students to study eliminating retirement b enefits, t hey should instead study what the cost will be to provide for the hundreds of thousands of se- niors with a 401(k) who may soon be facing the unfortu- nate predicament of lacking the resources to retire. On the legislative front, a Senate committee met in May to discuss SB 919 (Hollings- worth), which was recently in- troduced as a measure spon- sored by the governor. The bill seeks to create a two-tier re- tirement system for public em- ployees who utilize CalPERS by significantly reducing the current benefit structure for new employees. It would re- quire s chool em ployees t o work an additional 10 years to age 65 in order to receive the standard 2 percent formula. 30 California Educator | MAYEMBER SEPT 2010 2009 32 Example of CalSTRS retiree payout: Retiree age: 60 Final average salary: Years of service: $50,000 24 Monthly retirement benefit: $2,000 ($24,000 per year, replacing 48 percent of final average salary) the local government process in favor of perceived short- term gain that is not actuari- ally proven. The issue of securing an adequate retirement for edu- cators will be an ongoing dis- cussion as politicians s eek new ways to cut state costs at the expense of its workers. CTA is diligently working on behalf of educators — along with a broad coalition of la- bor organizations including teachers, nurses, firefighters, police, correctional officers and state workers — to pro- tect the secure and fair retire- ment of public employees. JENNIFER BAKER, DAVE EARL CARPENTER These tactics create a divi- sive atmosphere and penalize individuals for deciding to en- ter into a public service career. Public employees have been working diligently with their local government counterparts to find ways of cutting costs, which have resulted in salary cuts, furlough days and a mul- titude of other creative cost savings. SB 919 would bypass

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