Myths and Facts About PEPTRA of 2013

Bridging the CalSTRS Pension Gap for California Educators

The California Public Employees' Pension Reform Act (PEPRA) of 2013 significantly impacted CalSTRS retirement benefits, particularly for new hires.

While the average CalSTRS benefit replaces 50% to 60% of a career educator's salary, financial planning often targets 80% or 90% income replacement for a comfortable retirement. This creates a substantial retirement savings gap for many California educators. 

Key Pension Reforms Under PEPRA (2013)

  • Reduced Retirement Formulas: New members are subject to different formulas.

  • Increased Retirement Ages: For example, new employees may need to wait until age 62 to receive the same benefits that previous hires received at age 60.

  • Salary Caps: PEPRA caps the annual salary used for final compensation calculations, potentially lowering the pension amount.

  • Employee Contribution Rate: The law requires equal sharing of the employee contribution rate. 

Misconceptions

California educators have about PEPRA's impact on their retirement which can lead to a retirement savings gap.

1. "Classic" members are completely unaffected

Myth: Many educators believe that if they were hired before January 1, 2013, the reforms of PEPRA do not affect them at all. While the core benefit formula for these "classic" members is protected under the "California Rule," this is not the full picture. 

Fact: Reforms still impact how certain types of special compensation are counted toward their "final compensation". For example, PEPRA-related court decisions eliminated the ability to count payouts for things like unused vacation time, which can lower a classic member's final compensation and thus their pension. 

2. You must work until age 62

Myth: PEPRA set the "normal retirement age" for maximum benefits for new members at age 62, a later age than the previous standard. However, many educators mistakenly believe they cannot retire earlier. 

Fact: A PEPRA member can still retire as early as age 52 with five years of service, but this will result in a lower monthly pension benefit. The decision of when to retire requires a careful calculation of how an earlier, smaller pension compares to a later, larger one. For many, bridging the income gap may allow for retirement before age 62 without a significant lifestyle change.

3. My highest yearly salary will be used for calculation

Myth: Educators may assume their highest-earning 12 months of service will be used to calculate their final compensation. However, PEPRA changed this rule for new hires. 

Fact: For PEPRA members, final compensation is the highest average annual compensation over a three-year period. For classic members who return to service after a break, a blended calculation applies, using a one-year average for classic service and a three-year average for PEPRA service. This three-year rule makes it impossible to "spike" a pension by inflating income in the final year. 

4. Compensation caps limit what I can earn

Myth: For PEPRA members, annual compensation used in the pension formula is subject to a cap, adjusted each year. Some believe this limits their overall earnings potential. 

Fact: The cap only limits the amount of compensation that can be used for the pension calculation. It does not limit an educator's salary. Once an educator's earnings exceed the cap for the year, they and their employer stop making contributions for the remainder of that year, freeing up funds that could be channeled into supplemental savings. 

5. CalSTRS and CalPERS benefits are exactly the same

Myth: While similar in structure, CalSTRS (for teachers) and CalPERS (for school staff and other public employees) have different rules, benefit formulas, and impact from PEPRA. 

Fact: Because California educators are not part of Social Security, their retirement planning is unique and depends entirely on their CalSTRS pension and personal savings. Conversely, many CalPERS members may receive Social Security, which influences their planning.

The savings gap implications

These misconceptions can lead to two main problems for educators when it comes to the savings gap:

  • Underestimating the pension shortfall: If an educator mistakenly assumes a higher benefit factor or final compensation amount, they will be overestimating their pension income and failing to save enough to meet their retirement goals.

  • Underutilizing supplemental savings: Misunderstanding the rules around compensation caps and early retirement may cause educators to miss opportunities to redirect contributions to other investment vehicles, such as 403(b) or 457(b) plans, that can help them close the savings gap. 

Your CalSTRS pension may not tell the full story—but your plan can. Benefits Gap Solutions helps educators bridge the pension gap and build a secure, confident retirement.

Book your free Retirement Review today and see how small steps now can make a big difference later.

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