“With benefits de-linked from contributions, some individuals will receive benefits that cost more than the contributions made on their behalf and some will receive less, effectively a system characterized by cross-subsidies,” they explain. In other words, those who remain in the system for a very long time are significantly subsidized by newer and even many not-so-new teachers. This is in stark contrast to 401(k)-style defined-contribution plans or cash balance plans, a hybrid that has elements of both defined-benefit and defined-contribution plans. “Under such plans, there would be no cross-subsidies,” the authors observe. There is also the matter of how financially sound CalSTRS actually is. Under current assumptions, the system is only about 69 percent funded. The CalSTRS board will meet this week to consider reducing the pension fund’s annual investment rate of return assumption from 7.5 percent to 7 percent. The proposal was prompted by a report from the pension system’s actuary, Milliman Inc., which counseled that keeping the 7.5 percent rate “is not recommended since the probability of achieving this return is less than 50 percent.” It would follow CalPERS’ decision last month to reduce its return rate assumption from 7.5 percent to 7 percent over three years, and would be the third reduction for CalSTRS since 2010, when the rate was as high as 8 percent. Critics have long argued that such assumptions were unreasonable, and Green Rush led to smaller government pension contributions that shortchanged the system because they were inadequate to cover future liabilities.
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