What Types of California State Pensions are offered?
As a large and densely-populated state, California has divided its pension programs into two bodies. CALPERS (California Public Employees Retirement System) oversees the pension plans of the majority of state employees. CalSTRS (California State Teachers Retirement System) oversees the pension plans of all members employed by state educational institutions.
Together, the pension plan programs are funded at a ratio of 77.4%, as of 2013. This is down slightly from the 78% reported in 2012, but is still well within reach of the federal recommended 80% ratio mark.
Impending state budget reform could reverse the decline of pension funding and drive up the funding ratio significantly in the coming fiscal years.
CALPERS Member Classification and Benefits
Because the CALPERS system is so large, members are divided into different accounting classifications based on job function – all of which dictate their individual retirement contribution and benefits.
- CALPERS has Tier One and Tier Two membership options. Both options are available to all members and members can elect to switch to a different Tier through an application process. Tier One members currently contribute at a rate of 8.0%, and their monthly retirement benefits are calculated at an age factor of 2%. Tier Two members, as of 2013, now contribute at a rate of 1.5% of their income. Tier Two members have their monthly retirement benefits calculated at an age factor of 1.25%.
- CALPERS divided members into accounting codes and collective bargaining units. These units are based on job function (such as attorneys, administrators, firefighters, highway patrol, etc.) and are used to determine contribution rate and age factor. Most contribution rates are between 5% and 10%, but these can change annually, depending on the collective bargaining process. The age factors are calculated at a rate of 2% – 3%. CALPERS provides a useful table for determining account classification.
- CALPERS members who were hired before January 1st, 2013 may retire at age 50, with at least 5 years of creditable service. Members hired after January 1st, 2013 must retire at age 52, with at least 5 years of creditable service. Second Tier members must have at least 10 years of creditable service and cannot retire until age 55.
- Retirement benefits are calculated based on the benefit factor selected in one’s retirement plan, as well as total years of service and employer compensation. CALPERS provides a retirement calculator to estimate the monthly retirement benefit total.
- All CALPERS employees vest at 5 years of creditable service.
- Survivor benefits are available for CALPERS beneficiaries. The benefits range from a lump sum payment to 50% of total monthly retirement benefit. These survivor benefits depend on the selected retirement annuity plan and age of employee at the time of death. Both spouses and children are eligible to be beneficiaries.
- CALPERS pays its members an annual Cost of Living Adjustment, which cannot exceed the national inflation rate. For most employees, this equals an approximate 2% increase in their benefit. The COLA is paid out every May.
- CALPERS provides specialized plans for members of the National Guard and school safety officials. More information about these pension plans is available through the CALPERS website.
CalSTRS Eligibility and Benefits
The second major retirement pension plan for California is administered by CalSTRS and is available to all full-time and part-time state-sponsored educators. Teachers and professors at the university level are eligible to participate in this plan. School corrections officers and safety officials are covered under the previously-mentioned CALPERS plan.
- CalSTRS provides a standard defined benefit program, as well as a supplement benefit program that allows members to contribute additional amounts of payroll to their retirement fund.
- CalSTRS members who are enrolled in the basic defined benefit program contribute 8% of their gross pay. Their employer matches this contribution at a rate of 8.25% and the state also adds a contribution of 2.541%.
- CalSTRS members can retire at age 55 after accumulating 5 years of creditable service. Early retirement is available to members with 30 years of creditable service at age 50. Most membership retirement benefits are calculated at an age factor of 2%. Retirement benefits also depend on the member’s age and years of creditable service. A formula for calculating retirement benefits can be found in the CalSTRS annual membership handbook.
- All CalSTRS members become vested after accumulating 5 years of creditable service.
- CalSTRS members may purchase additional years of qualifying service credit. Military service, out-of-state or foreign public education services, sabbatical leave, or maternity/paternity leave can all be converted into creditable service years.
- In the event of a member’s death, CalSTRS provides a number of options for surviving beneficiaries. Beneficiaries may take a lesser lump sum payment or a lifetime reduced monthly benefit. These benefits depend on the selected annuity plan and the age of the member at the time of death.
- CalSTRS retirees may be eligible to receive a Cost of Living Adjustment that is equal to the adjusted federal interest rate (usually about 2%). This is not a guaranteed adjustment and is voted on every year.
- Employees who are only employed on a part-time basis are eligible to participate in a Cash Balance program. This program requires members to contribute 4% of their pay, which is matched at 4% by their employer. At age 55, all Cash Balance funds are withdrawn to the employee, including interest and potential additional investment funds.
Other California Pension Plans
There are over 40 public retirement systems in the state of California ranging from smaller city and county retirement plans to the California Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). CalPERS is made up of over $242 billion in assets and CalSTRS is made up of $154.3 billion in assets, as of June 30, 2011, making them the largest and second largest public retirement systems in the nation, respectively. CalPERS covers pension benefits for all state employees as well as the employees of 26 counties and over 1,500 political subdivisions and school districts.
Most employees will fall under either the CALPERS or CalSTRS pension plans because of the multitude of accounting categories. However, California does offer a few specialized pension plans for those who do not qualify for either plan.
CALPERS also administers a Judges Retirement Plan, which is for eligible elected and appointed California justices.
Employees of colleges in the UC system may elect to join the University of California Retirement Plan instead of the CalSTRS. Similar to other pension plans, the UCRP allows employees to retire after reaching age 55 and accumulating at least 5 years of creditable service.
When You Retire
CalPERS retirement benefits are adjusted for cost of living increases. The adjustments begin to take effect in May, two calendar years after retirement. For example, a member who retires in December 2004 will have cost of living adjustments go into effect in May 2006, while a member who retires in January 2005 will have cost of living adjustments go into effect in May 2007.
Survivor benefits are available under CalPERS, depending if members select the option. Members may name any person, corporation, estate or trust as a beneficiary.
Some employers pay for and offer the benefit of Survivor Continuance, separate from these options. If no beneficiary is named, survivor benefits will be given to, in order, a spouse or domestic partner registered at least one year prior to retirement, unmarried children under 18 or a disabled child who was disabled prior to age 18, or qualified, economically dependent parents.
The official website for CalPERS can be found at http://www.calpers.ca.gov and complete details about all California retirement plans can be found there. CalPERS also offers an online Retirement Estimate Calculator to see an estimation of your benefits based on the set formula, and to see how various retirement dates may impact your benefit amount. Retirement Estimates are available at www.calpers.ca.gov/index.jsp?bc=/phx/eip/self-id-member.jsp. There is a large potential for upcoming change in California pension programs due to the fact that many new elected officials from the most recent election are seen to be strict pension reformers looking to cut funding.