The primary mission of CalSTRS (California State Teachers Retirement System) is the provision of retirement-related benefits and services, for community college and public school teachers, throughout the state of California. CalSTRS is the largest retirement fund for teachers in the United States, with 852,316 members/beneficiaries and assets totaling $155.4 billion, as of April 2011. The system is a defined benefit retirement plan, and as such, CalSTRS contributions are tax deductible for employers, but not for employees.
Defined Benefit Plan
Your CalSTRS pension is a defined benefit plan. What this means is, once you are a vested member (have full access to benefits), you will receive guaranteed lifetime benefits. Retirement benefits are definite and determinable, calculated as a dollar amount or a percentage of your wages. Usually, these calculations are done using a combination of your wages, age or total years of employment. The formula used to calculate CalSTRS pensions is service credit multiplied by age factor, which is then multiplied by final compensation (salary/wages at time of retirement).
Typically, benefits are paid to employees in the form of lifetime annuities (money paid at regular intervals). You are eligible to receive retirement benefits once you have reached age 55 with a minimum of five years of service credit, or by age 50 and 30 years of service credit. As a member of the CalSTRS Defined Benefit Program, you contribute a portion of your creditable compensation (all salary and wages paid to you as recorded on your W-2) to your pension.
CalSTRS is funded by employer contributions (employing school district or community college district), member contributions and money from the General Fund and investment earnings.
CalSTRS contributions are tax deductible for employers, according to IRS Publication 560. Employee or member contributions are not deductible, but earnings on your contributions are tax-free until distribution of your benefits begins. As of June 6, 2011, CalSTRS members contribute 8 percent of their creditable compensation, employing school districts contribute 8.25 percent of your earnings and the state of California contributes 2.017 percent.
According to wealth management firm Merrill Lynch, defined benefit plans offer the “greatest possible retirement benefit for employees.” With this type of pension, employer contributions can surpass those allowed with other retirement plans, with a maximum annual benefit up to $195,000 as of 2010. The mandatory employer contributions made to the CalSTRS Defined Benefit Program are tax deductible for the employing school district. Interest and earnings on all contributions are usually tax-free until distribution begins. The tax deduction limit on an employer’s contributions to the CalSTRS pension is determined by the assumptions and computations of an actuary (statistician who calculates pension rates and premiums).