A Guide to the California Public Employees’ Retirement System (CalPERS)
Different states in the US administer pension and other benefit programs for their public-sector employees and retirees. Hawaii Employees Retirement System, California State Teachers’ Retirement System (CalSTRS), and Florida Retirement System (FRS) are some of the examples of the state-run retirement programs that provide pension and other benefits for government employees.
This article discusses the important features of the California Public Employees’ Retirement System (CalPERS) with a special focus on determining the retirement benefits you can expect to get in your retirement.
What is CalPERS?
California Public Employees’ Retirement System, or simply CalPERS, was established as the "State Employees' Retirement System" (SERS) in 1932. It is a 401(a) defined benefit plan, which means the payment you receive on your retirement does not depend on the contributions you or your employer make but, instead, is based on a formula.
More than 2 million members are registered with CalPERS as of June 30, 2019, with 38% of the total members belonging from schools, 31% from public agencies, and another 31% from the state of California. Public Employees’ Retirement Fund (PERF) maintained by CalPERS has a market value of more than $392.5 billion as of June 30, 2020.
Understanding the CalPERS Pension
The earliest you can retire is at age 50 with a service credit of five years. However, if all your service was earned on January 01, 2013, or after, the minimum age for retirement becomes 52. There are some exceptions to the five-year rule: if you have worked for five years on a part-time basis, or you are a member of a reciprocal retirement system, you can contact CalPERS to find out if you are eligible to claim an exemption.
Your retirement income can come from one or a combination of the following sources:
- CalPERS Pension,
- Social Security, and
- Your Personal Savings
In this section, we will focus on the CalPERS pension.
CalPERS have fund managers who manage funds in your pension fund and make investment decisions on your behalf to grow your money for your retirement. After you retire, you will receive retirement income checks every month throughout your life, which means that you won’t outlive your pension.
Around one-third of the money you receive at the time of retirement comes from contributions from you and your employer, while the remaining two-thirds of your pension comes from the earnings on investments.
The Formula for Calculating Pension
The formula uses three factors to calculate your pension income:
1- Service Credit:
Service credit in the formula denotes your total time spent on jobs with CalPERS-registered employers. You earn service credit on the basis of completing a fiscal year, which starts from July 01 through June 30. You need to work for at least 1,720 hours, 215 days, or 10 months, depending on the type of your pay structure, to earn service credit for one full year.
2- Benefit Factor or Age Factor:
The benefit factor represents the percentage of your pay that is determined by your age at retirement and the retirement formula based on your membership date.
3- Final Compensation:
Final compensation is calculated by taking the average of the highest annual compensation during any consecutive 1- or 3-year period of employment. Instead of earnings, the full-time pay rate is used to calculate the final compensation. For part-time workers who are paid hourly, they can convert their pay rate to a monthly equivalent.
So, when we multiply the service credit, benefit factor and final compensation with each other, we get your estimated retirement income. The formula for retirement income is:
Retirement Income = service credit x benefit factor x final compensation
You can use the Retirement Estimate Calculator developed by CalPERS, which will help you estimate your pension amount based on a variety of scenarios defined by you.
How You Can Maximize Your Pension Amount
You can maximize your pension amount in the following three ways:
1- Increasing Service Credit
You can increase your service credits by working longer, purchasing service credit (if available), or converting your unused sick leave to service credit at the time of retirement.
2- Increasing Benefit Factor
The Benefit Factor increases with each year of your age, up to a maximum cap. So, naturally, the later you choose to retire the larger your benefit factor, which will ultimately increase your pension payment.
3- Increasing Final Compensation
Getting a promotion or a pay raise can increase your Final Compensation, which can increase your pension as well.
What Other Kind of Retirement Benefits Does CalPERS Offers?
The retirement formula we discussed above varies and depends on the classification of the job, category of membership, and special contractual provisions between CalPERS and the employer.
Along with the traditional service retirement, the CalPERS also offers two additional types of retirement:
1- Disability Retirement
If you have an injury or illness that renders you disable or prevents you from performing your duties, you may apply for disability retirement. The cause of the disability doesn’t have to be related to your job.
2- Industrial Disability Retirement
If your disability results from job-related illness or injury and you are a local or state safety member with the benefit contracted by your employer, you may be eligible for industrial disability retirement.
CalPERS pension system is the largest public pension fund in the United States. The Public Employees’ Retirement Fund (PERF) maintained by CalPERS has paid roughly $25.8 billion as of July 30, 2021, with an average monthly allowance of $3,182 to all existing retirees, while $3,562 to new retirees. If you are employed in public-sector organizations in California, you might be eligible for CalPERS. The system is a 401(a) defined benefit plan, and you get a fixed monthly amount each month, irrespective of the performance of the underlying investments, throughout your life after retirement. The payout, instead, is based on a formula. Therefore, it is essential to understand the formula to estimate your retirement income and take steps to increase it. By planning for your retirement beforehand, you can ensure that the income you receive on your retirement is enough for you to lead a comfortable retirement lifestyle.