Troubling Trends for California’s State Teachers Retirement Fund (CalSTRS)
Guest Post by Neil Murphy
Recently, I reviewed the STRS Connections On-Line Newsletter and discerned some troubling trends.
Trend Number One (Contributions vs. Benefits Paid):
Contributions from STRS members (teachers), the State and school districts equaled $8,288.519 for 2016. Benefits paid to retirees equaled $13,148.558 for 2016. Contributions are not keeping up with benefits paid to retirees.
Trend Number Two (investment assumption):
STRS used to project a 7.5% rate of return on its investments; in the recent past it downgraded its rate of return to 7.25%; now it is 7.00%. Because of the recent downgrade, the State just increased its contribution rate by 0.5%; this will not make taxpayers happy. Also, new teachers, hired after January 1st, 2013, will see a 1% increase in their contribution rate probably beginning in the year 2018.
Trend Number Three (Global Equity):
The investment portfolio of STRS is diverse. STRS invests in real estate, private equity, global equity, etc. However, 54.8% of its investment portfolio is tied up in global equity. This probably explains why STRS just downgraded its rate of investment to 7.0%. Here are some issues that I have with Global Equity Stocks:
BRIC (Brazil, Russia, India and China) were hailed as the new super economic engines. Newspaper article after article promoted the idea that these four countries would change the global economy so that it would move in an upward trend. This was true for a while. Unfortunately, Brazil’s economy has become anemic due to its vast political troubles (government scandal after scandal). China’s growth has slowed dramatically. Russia’s economy has been underperforming somewhat in part due to the economic sanctions placed on it; plus, its economy is too reliant on oil.
The European Union is still struggling. Spain, Italy, Greece and other European countries are seeing debt choking the breath right out of their economies. Germany is still performing extremely well, but France’s economy is sputtering.
Japan’s economy has not been strong since the early 1990s. Moreover, Japan is going to have some serious economic issues in the near future. Japan’s population is aging and Japan has negative population growth. There won’t be enough workers to pay for the retirees. Plus, the Japanese have the longest life span of any other group of people. Overall, Japan’s economy is headed for disaster.
Based on the economies of other countries, it is my prediction that STRS won’t even reach its 7.0% forecast. I wouldn’t be surprised if STRS reduces its rate of return from 7.0% to 6.75% within the next ten years.
Trend Number Four (U.S. Economy):
The $20 trillion debt and growing cannot be ignored. The U.S. cannot keep increasing the debt ceiling every year. Once the U.S. stops increasing the debt ceiling, then the pain of the $20 trillion debt will settle in. Taxes Troubling Trends for California’s State Teachers Retirement Fund (CalSTRS) | Crazy Normal - the Classroom Exposé: