Rudy Fichtenbaum takes on the STRS propaganda machine

From Rudy Fichtenbaum

September 9, 2022

The STRS Propaganda Machine

by

Rudy Fichtenbaum

September 9, 2022

The STRS propaganda machine on Facebook and with its E-News has been hard at work trying to mislead members and the public. One of their tried-and-true methods is by making a straw person argument -- an argument that misrepresents or distorts someone’s position followed by an attack the distorted position thus created.

During and after the STRS elections, several people pointed out that STRS was the only major public pension in the U.S. with a negative normal cost. Specifically, members were paying in 14% of their salaries but receiving a pension benefit that was worth only 10.86% of their salary. Thus, active teachers are getting a pension that is worth less than the actuarial value of their contributions.

What is normal cost? Normal cost is: “the cost of the benefits earned in a current year.” A more technical description is “the actuarial present value of benefits accrued in the year.” These costs are stated as a percentage of salary. If the normal cost was 10.86%, then the cost of the benefits earned in a year were equal to 10.86% of that member’s salary. How much did they contribute? The answer is 14%. Therefore, the contribution the teacher made was worth more than the cost of the benefits earned.

How has STRS responded? Their response is the average career teacher contributes $215,000 and has a projected total benefit of $2 million. “This number is based on the average single life annuity for a member retiring at the end of the 20-21 school year with an unreduced benefit, average PLOP payment, and factoring in periodic COLAs. The average age at retirement for Fiscal Year 2021 was 59 with a life expectancy to 87.” The implication is the benefits received are substantially greater than what this teacher contributed.

The above-quoted STRS response is problematic – an understatement – in several respects.

First, how can STRS factor in a periodic COLA when the Board has not approved a program of periodic COLAs – when in fact the annual COLAs that STRS members were long-promised have been cancelled since 2017 with the exception of a one-time COLA in 2023. Evidently, the STRS propaganda machine will go great lengths to mislead members and the public. Second, of course, the average career teacher, who retired in 2021, will of course get more than they contributed to the pension. To pretend or claim that STRS critics claim otherwise is a classic straw person argument. Over the 35 years they were working and contributing to the pension, STRS was not putting that money under a rock, although at times it feels that way. STRS was investing that money, and the contributions made by our average career teacher were compounding. Also, when teachers retire and start collecting their pension, most of the money they contributed is still earning a return. After all, pensions are not paid out as a lump-sum.

Using an example of annuity can help illustrate how the STRS propaganda machine tries to mislead members and the public. Assume that each pay period a person works, a certain amount of money is taken from their paycheck, and it gets invested. Suppose the person has a starting salary of $50,000 a year at age 24, gets a 2% raise each year, contributes 10% of their pay to fund an annuity (aka retirement fund), earns a 6% rate of return, and finally retires after 35 years at age 59. Further assume they live to be 92.

At retirement, they can begin withdrawing $49,092.94 each year and have $0 left at age 92. Over their career they would have contributed $249,972 and the annuity would have paid out $1,669,160. So, the annuity would have paid them approximately 6.7 times what they contributed. They received 6.7 times what they contributed because of investment earnings. They received all the money they contributed plus investment earnings.

Now suppose the company holding their savings says, we made some bad decisions, and we owe money to someone else that we hadn’t anticipated when we told you that you were going to get $49,092.94 every year. Therefore, we are going to reduce that amount by $5,000 per year. In that case, our teacher would have still contributed $249,972 but would receive a total of $1,499,160.

That teacher would certainly be justified in saying I did not get what was promised. My contributions were supposedly going to be worth $1,669,160, but you cut my payments to $1,499,160, so I am getting less than the value of my contributions, which includes investment earnings. Upon hearing this complaint, the company issues a press release saying that it will still pay the annuitant 6.0 times what was contributed, so they should not complain about the cuts.

This is exactly what STRS is doing when it puts out misleading statements to try and distract attention away from the fact, that it is the only major pension in the country with a negative normal cost. A negative normal cost means they actuarial value of the benefits earned in a year as a percentage of salary is less than the percent of salary paid to fund those benefits in a year.

To quote Dolly Parton and Kenny Rogers “you can’t make old friends” but you sure can lose them when you break your promises and use straw person arguments to deflect criticism and avoid accountability.

Our members have spoken, and it is time for a change!