Both CalSTRS and CalPERS have mechanisms in place to guard a retiree’s defined benefit pension against eroding purchasing power. The first is a cost-of-living adjustment, or COLA, and the second is a “floor” below which the buying power of a pension cannot fall. Now thanks to a CFT-sponsored bill recently signed by Governor Newsom, CalSTRS retirees from earlier decades will see additional relief.
First about COLAs. The COLAs are slightly different for the two systems and neither reflects the full rate of inflation in a given year. Instead both are capped at 2% regardless of the actual rate of inflation. As a result, the purchasing power of a retiree’s pension will erode over time.
However, the COLA for CalPERS pensions is compounding. It adds 2% in the first year. It then then adds 2% of the increased pension amount the next year, and 2% of the again increased pension amount the next year, and so on. As a result, the COLA for CalPERS retirees becomes larger over time.
The COLA for CalSTRS retirees is not compounding. It adds a fixed 2% of the member’s original pension benefit each subsequent year. This means the buying power of a CalSTRS pension erodes faster than a CalPERS pension.
Now about floors. The floor below which the buying power of the pension benefit cannot fall has different names in each system. For CalSTRS, it is called the Supplemental Benefit Maintenance Account, or SBMA. For CalPERS, it’s called the Purchasing Power Protection Allowance, or PPPA.
For CalSTRS retirees, the SBMA floor was 85% until recently. Once an original pension benefit lost 15% of its purchasing power, CalSTRS would issue a separate check to the retiree, in addition to their regular defined benefit pension check. This supplemental amount makes up the difference between the regular pension and the 85% purchasing power floor.
This SBMA payment ensures that the purchasing power of a CalSTRS retiree’s overall pension benefit does not fall below 85% of its original buying power. Also, the SBMA payment is not capped at 2% — it increases at the actual rate of inflation for the previous year.
For CalPERS retirees, the PPPA functions the same, except the purchasing power floor of the pension benefit is 75% rather than 85%. Once the purchasing power of the original pension erodes to 75%, CalPERS issues a separate PPPA check to make up the difference between the regular pension amount and the 75% purchasing power floor. So even though a CalPERS pension benefit erodes more slowly than a CalSTRS pension benefit, it can erode to a lower guaranteed purchasing power.
The high inflation rate in 2022 will push the purchasing power of CalSTRS pensions down to the 85% floor for about 50,000 retirees. As a result, these retirees will receive a second check from CalSTRS — the SBMA as described above — starting in October. SBMA benefits are paid quarterly, in the same manner as the regular benefit. For example, if the regular benefit is a direct deposit, the SBMA will also be a direct deposit. CalSTRS members don’t need to do anything to initiate their SBMA benefit.
In a significant legislative win this year, CFT-sponsored AB 868, which was supported by CalSTRS, changed the floor for members who retired prior to 1999. Prior to then, CalPERS pension benefits were significantly more generous than CalSTRS benefits. In 1999, the CalSTRS pension benefit formula was changed to make CalSTRS benefits almost as generous as CalPERS.
However, this new CalSTRS formula was not retroactively applied to pre-1999 retirees. The pensions of these retirees were so low that the 85% floor allowed the incomes of some to fall well below the poverty line.
AB 868 (Cortese, D-San Jose) addressed this problem by raising the purchasing power floor for those who retired during the 1970s to 100%, those who retired in the 1980s to 95%, and those who retired in the 1990s to 90% of their original purchasing power. These changes will take effect in the 2023-24 fiscal year and these retirees will likely see three checks:
- their original pension benefit,
- their ongoing SBMA check, and
- a check reflecting the new floor as a result of AB 868.
For CalPERS pensions, no change was made to the PPPA floor because there was no significant change in the benefit pre- and post-1999. However, the high inflation in 2022 will lead to many CalPERS retirees receiving a PPPA check for the first time, an adjustment CalPERS makes in May of each year.
— By Doug Orr, Chair of the CFT Retirement Policy Committee, and a member of the San Francisco Community College Federation of Teachers Retiree Chapter, Local 2121-R
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FAQs
Both CalSTRS and CalPERS have mechanisms in place to guard a retiree's defined benefit pension against eroding purchasing power. The first is a cost-of-living adjustment, or COLA, and the second is a “floor” below which the buying power of a pension cannot fall.
Does CalPERS have inflation protection? ›
Purchasing Power Protection Allowance (PPPA) is a benefit designed to maintain the original purchasing power of CalPERS retirees to a predetermined limit when accumulated Cost of Living Adjustment (COLA) has not maintained pace with inflation.
How can I protect my pension from inflation? ›
Withdrawing money at a conservative rate during retirement is also a way to make your savings last longer. One popular approach is known as the “4 percent rule,” which says you should withdraw no more than 4 percent of your retirement account in any given year if you're planning on a 30-year retirement.
Does CalSTRS pension increase with inflation? ›
At CalSTRS, we offer two programs intended to ease the impact of inflation on our members. First is the simple benefit adjustment, which provides a 2% increase to your monthly pension every September. This increase is based on your initial benefit and is not compounded as benefits increase.
Will CalSTRS have a COLA in 2024 in California? ›
The COLA takes effect the second calendar year after retirement to help retirement benefits keep up with the rate of inflation. Eligible retirees, beneficiaries, and survivors who receive a monthly benefit will receive the COLA in their May 1, 2024, retirement check.
Will CalPERS retirees get a COLA in 2024 in California? ›
The 4.12% inflation rate this year will be used in calculating the 2024 COLAs for CalPERS retirees and will be reflected on the May 1, 2024 retirement checks.
Do CalPERS retirees get COLA every year? ›
COLA is an annual cost-of-living increase that begins the second calendar year after retirement and helps your retirement benefit keep up with the rate of inflation. Eligible retirees, including survivors and beneficiaries who receive a monthly benefit, receive COLA on their May 1 retirement check.
Do teachers' pensions adjust for inflation? ›
Some years retired teachers get COLAs that are actually larger than inflation. However, the net effect in 2022 and 2023 has been that public pension COLAs frequently are less than inflation. Teacher pension COLAs vary in how much inflation protection they provide, and in who gets the benefit adjustments.
What happens to pensions when inflation is high? ›
Pensions and Inflation
Pension plan benefits are usually tied to the last several years' salary rates earned by the employee. If a period of high inflation hits during the last year or two of a retiree's career, their benefit amounts may come in lower as they are partially based on pre-inflation salary figures.
How to protect your retirement from nagging inflation? ›
Investing in a mix of asset classes, such as stocks, bonds, and real estate, is an effective way to outpace inflation. Maximizing Social Security benefits through timing claims and understanding COLA adjustments can help retirees navigate their golden years amidst rising costs of living.
The difference Disability benefits paid by CalSTRS are generally higher than those paid by CalPERS, but CalPERS members also may be eligible for disability benefits under Social Security. In addition, CalSTRS benefits increase if there are dependent children; CalPERS provides no coverage for dependent children.
Is CalSTRS a good pension? ›
CalSTRS pension benefits replace an average of 50% to 60% of members' final salary in retirement. This may not be enough to sustain how you envision living in retirement.
Is CalPERS pension for life? ›
CalPERS is a 401(a) Defined Benefit Plan. This means that your benefit amount is determined by a formula and not what you contribute to the plan. Once you're eligible and you retire, your benefit is payable for life. service credit, you still may be eligible to apply for a service retirement.
Can you collect both CalSTRS and Social Security? ›
If you're receiving Social Security now, your Social Security benefit may be reduced or eliminated when you begin receiving your CalSTRS benefit. If you take a CalSTRS refund, your Social Security benefit still may be subject to offset.
What is the maximum pension for CalSTRS? ›
The limitation on the annual benefit for CalSTRS members or participants, age 65, who participate in the DB or CB Benefit programs is $234,201 for the 2024 calendar year. The limit assumes a 2% at 60 benefit formula and is actuarially adjusted for retirement before and after age 65.
What is the rule of 85 for CalSTRS? ›
CalSTRS makes these payments to retired members and beneficiaries whose benefits have fallen below a certain level of purchasing power, subject to the availability of funds. The purchasing power protection level is currently set at 85% of your initial benefit (base allowance).
Do pensions get adjusted for inflation? ›
If you have a pension, it may or may not adjust for inflation but it's debatable whether the increases have been sufficient. Social Security benefits are adjusted for inflation every year. Inflation has a direct impact on the revenue, savings, and spending of all consumers, including retirees.
What is inflation protection coverage? ›
Key Takeaways. Insurance inflation protection is a feature of some insurance policies whereby future or ongoing benefits to be paid are adjusted upward with inflation. The goal is to ensure that the relative buying power of the dollars granted as benefits do not erode over time due to inflation.
Is CalPERS financially sound? ›
CalPERS Reports Preliminary 9.3% Investment Return for 2023-24 Fiscal Year. SACRAMENTO, Calif. – CalPERS today reported a preliminary net return of 9.3% on its investments for the 12-month period ending June 30, 2024. Assets as of that date were valued at $502.9 billion.
What are CalPERS retirement benefits? ›
CalPERS offers a defined benefit plan where retirement benefits are based on a formula, rather than contributions and earnings to a savings plan. Retirement benefits are calculated based on a member's years of service credit, age at retirement, and final compensation (average salary for a defined period of employment).
