ESTA UPDATE
East Side Teachers Association/CTA/NEA 888 So. Capitol Ave San Jose, Ca 95127 October 31, 2002
Don McKell, President Julie Pratico, Vice Pres Carla Holtzclaw, Secretary Ralph Giannini, Treasurer
mckelld@esuhsd.org fax: (408) 272-7569 voice: (408) 272-0601 website: www.EastSideTA.org
FINANCIAL EDITION
STATE TEACHER RETIREMENT SYSTEM (CalSTRS)
Certificated employees in California schools pay into the State Teachers Retirement System. How much you pay is established by law: generally, 8% of your gross earnings in every year of your employment. Your 8% is matched by the district, which actually pays 8 % of your gross earnings to your account. (The extra quarter percent is skimmed to cover administrative costs.) Thus, for the duration of your career as an educator, some 16% of your earnings is used to purchase what amounts to an annuity from a huge insurance company we call STRS.
Largely due to adept CTA lobbying on our behalf, the STRS picture has changed very much for the better in the last few years. A profound change kicked in last year, and provides that 8% of all certificated earnings not just salary is matched by the school district and transmitted to STRS to be held in trust for your benefit. Each of us now has what amounts to two STRS accounts.
The main event is called your Defined Benefit (DB) account. The newer one is called your Defined Benefit Supplement (DBS) account.
STRS Defined Benefit
Depending upon a series of choices you make with STRS as you approach or enter retirement, your DB account will pay out a predictable annual amount for the duration of your (or your spouses) retirement life. To simplify things in this article, lets discount the choices and work with whats called your unmodified allowance (UA). STRS will calculate your UA from a formula: C x Y x A + L. In this formula, C = highest compensation, Y = years of service, A = age factor, and L = longevity bonus. The more you are paid while working, the longer you work, and the older you are when you retire, will all increase your annual UA.
Lets take a brief look at each of these three factors, as they are arrived at under current* STRS rules:
C (highest compensation) will either be your highest consecutive 12 or 36 months contract compensation, depending upon whether you have 25 or more years STRS credit at retirement. "Contract compensation" is your salary schedule salary, plus masters/doctorate, plus (if Measure J passes) your credential bonus.
Y (years of service) will be your credited service plus your unused sick leave. Sick leave is converted into years by dividing your number of unused days by the number of days in a full work year. For us, this is 182 at the present time.
A (age factor) is a complicated little number that is most easily gotten off of a table provided by STRS. For the mathematically inclined: If you are between 55 and 60 when you retire, you can start with 1.40% and add 0.01% for every month in your age beyond 55. If youre between ages 60 and 63, start with 2.00% and add 0.033% for each 3 months in your age beyond 60. Then, if you have 30 or more years STRS credit, add another 0.2%, to a maximum of 2.400%. (I told you it was complicated!)
L (longevity bonus) is based upon the number of years youve been a STRS member, not inclusive of unused sick leave. If you retire with 30 years service, L = $2,400; with 31 years, L = $3,600; with 32 or more years, L = $4,800.
Example: Sally retires at age 60, with 30.975 STRS years, 193 unused sick days, and with 12 highest consecutive month contract compensation of $80,000.
UA = $80,000 x (30.975 + 193/182) x (.02067 + .002) + $2,400
highest pay years of service age factor longevity
Sallys UA would be $60,499, or $5,042/month.
= = = = = = = = = = = = = = = = =
Suppose Sally delays retirement by one year, getting a 2% COLA raise and using 5 sick days in the last year.
UA = $81,600 x (31.975 + 198/182) x (.022 + .002) + $3,600
highest pay years of service age factor longevity
By waiting that one year, Sallys UA would be $68,350, or $5,696/month.
Lets examine Sallys 30.975 years of STRS credit. That number is only about four days shy of being 31.000 years, and bears looking into. It may be that Sally wasnt hired until the fifth day of school in her very first year, or it may be that Sally was punished for some infraction at some point in her career and got four days of unpaid leave. It may be that Sally took four days too many one year for Personal Necessity leave. There are other possibilities. Among those that should definitely be considered is that either the District or STRS has made a mistake. It happens regularly. Those four days will have an immeasurably slight impact on the "years of service" part of her UA computation, but will have a huge impact on Sallys longevity bonus. If they are a mistake, its a $1,200 per year mistake for as long as she lives. Every year, we all get annual account statements from STRS in the mail. When you get yours (usually in February) check your years of STRS Service Credit carefully. Get in touch with me if you spot what may be an error. We can correct those, but it takes time.
Even if its not an error, Sally could work beyond July 1 of the summer she intends to retire, long enough to earn back the fractional service credit she needs, and then retire.
All this and more is covered in a booklet put out by STRS. You can request a Member Handbook from STRS by calling (800) 228-5453, or visiting the STRS website at www.calstrs.ca.gov.
(see over for Defined Benefit Supplement details)
STRS Defined Benefit Supplement
In the wake of massive teacher hiring brought about by class size reduction, STRS found itself with a growing fund surplus in the late 1990s. A number of changes were eventually implemented to return this money to its rightful owners: California teachers. One of the changes brought about during this period was the creation of a separate fund, managed by STRS, to invest contributions arising out of income from all of the other ways that teachers earn money: coaching, attendance at paid workshops, substituting, summer school, and various other extra duty pay sources, all matched by the district. STRS now also diverts one quarter of your 8% DB contributions into your DBS account. The next time you get an account statement from STRS, you will see that the balance of your DBS account has started to grow. For teachers just beginning a career, it should be exciting to think how much of a nest egg will accrue in a DBS account after 30 or more years. For the rest of us, well, itll be something short of a fortune, but better than weve had up to now. Upon retirement, youll be given a range of choices, from taking the entire lump as a one-time payout or spreading the payments out over a period of time as some sort of annuity.
125 PLAN
There are a great many health-related expenses that could occur in a year that are not covered under any of the medical, dental, or vision fringe benefits plans available to district employees. Examples might include hearing aids, dental implants, some contact lens and eyeglass choices, wheelchairs, and even certain home remodeling to accommodate yourself or a dependent (child or adult) with a disability. Fortunately, if a district employee is able to predict expenses like these in advance, s/he can at least soften the blow by setting some of income aside into a Medical Spending Account (MSA), provided for under rules laid out in section 125 of the IRS Code. An MSA allows the use of "pre-tax", instead of "after tax", dollars to pay for allowable expenses. Depending upon your tax bracket, this could save you some serious dollars. The catch is: you have to enter into a 125 Plan agreement with your employer prior to the beginning of the calendar year in which you plan to spend the money, setting aside a certain amount of your monthly income into your MSA, and what you dont use by the end of that year, you lose. Hence, the need for predictability.
Another feature available though 125 Plans is the ability to use pre-tax dollars to pay for a portion of any dependent (child or adult) care costs you might incur.
The 125 plans in our district are administered through American Fidelity, whose agent Tracy Gipson is available at (800) 365-8306 x0, and who will be circulating literature about the possibilities and making appointments at school sites in the near future. If you have some child care or medical-related costs looming in calendar year 2003, give the man a call and find out more about this opportunity.
Incidentally, if you currently have a 125 Plan, be aware that it does not automatically continue from one year to the next; it must be renewed annually to continue.
403(b) ACCOUNTS
If you work a 30-year career as a teacher and retire with a spouse at around age 60, you can count on your annual STRS retirement allocation to pay around 2/3 of what you were earning in your last working years. Of course, you wont be having STRS (or union dues) being subtracted from that, and you wont have the same kinds of expenses (like transportation or classroom supplies) that you had while you were teaching. That said, you should still ask yourself how easy it would be for you to exist on 2/3 of your current salary. If you dont like the answer, start today to do something about it. Current laws allow teachers to shelter as much as $12,000 per year of their salary into a tax-deferral program that could have profound implications in your later years. There is no shortage of vendors of 403(b) investments out there, so do some homework and shop around. If you find a comfortable investment that pays a modest 6%, and shelter as little as 2% of your salary every year for a 30-year career, youll amass the better part of $250,000 in your 403(b) account. That will be an amount roughly equal to twice your final years teaching salary. Small increases in your annual set-asides result in huge changes in that final number. Having a respectable balance in a 403(b) account could make a big impact on your retirement options, in both timing and lifestyle. Speak with an expert.
SOCIAL inSECURITY
All teachers hired since 1986 (and some who were hired before that who voluntarily opted in) pay 1.45% of their gross earnings into Medicare, thereby setting the stage for old age medical insurance coverage. Beyond that, no California teacher pays into "Social Security" unless s/he has employment income apart from education. Our state is one of a dozen that has its own public employee retirement system, thereby exempting such workers (under current law) from participating in the federal Old Age, Survivors, and Disability Insurance (OASDI) program. However, teachers who entered the profession after working in the private sector, or hold down second jobs at points during their educational employ, or whose spouses qualify for Social Security, may actually be eligible for a Social Security retirement pension. The nasty thing about these situations is currently two pieces of federal legislation, referred to as the Social Security Spousal Offset and the Social Security Windfall. Even though an individual may qualify for a Social Security pension in 36 other states, theyll only get a small fraction of their SS pension once they begin drawing STRS retirement in California. This is a huge disincentive for people from industry to choose teaching as a second career at a time of growing teacher shortages. Its also a ripoff for California teachers whove worked two jobs paying their obligatory Social Security taxes on their non-school income and wholl get only a fraction of the Social Security pension they would have earned had they lived in another state. Two bills that would repeal these provisions at the federal level are HR2639 (Berman/McKeon) and S1522 (Feinstein), and have the support of our local representatives. Visit www.nea.org/lac/socsec to see sample letters you could write in support of these bills.