The change is part of a four-year experience analysis that sets the parameters for determining the financial health of the system. The assumptions update the actuarial experience analysis covering 2006 through 2010 and are used to evaluate the impact of both demographic and economic factors on the long-range financial health of CalSTRS. These assumptions, in turn, have a significant impact on the valuation of the plan, a snapshot of its financial health, is scheduled to come before the Teachers’ Retirement Board in April.
The most recent past valuation, presented in April 2011, showed a $56 billion funding shortfall, meaning that available assets fell $56 billion short of the system’s long-term obligations.
“Any funding plan the Legislature and Administration develops for CalSTRS should reflect the most realistic expectations for the future, in order to effectively plan for the payment of CalSTRS benefits to its members,” said Teachers’ Retirement Board Chair Dana Dillon. “We have to keep in mind that CalSTRS cannot set its own contribution rates – only the Legislature and Governor have the authority to do so. Also, teachers do not receive Social Security for their CalSTRS covered employment, so the defined benefit pension may be their only source of retirement security.”
The current experience analysis contains three significant recommended changes to CalSTRS assumptions:
- Lowering the investment return assumption from 7.75% to 7.5% annually,
- Changing the mortality assumption to reflect the fact that members are living longer, and
- Lowering the assumption of wage growth from 4% to 3.75% annually.
“Of these, the most significant change is the investment return assumption, because the projected lower future returns makes it much more likely that we cannot invest our way to financial health. We’re still feeling the effects of the global financial crisis,” said CalSTRS CEO Jack Ehnes. Last year, CalSTRS lowered its interest rate assumption from 8% to 7.75% (see CalSTRS Lowers Actuarial Assumptions).