Teacher Pensions Blog

  • Portability is a key issue in the pension debate. But what exactly does this mean? 

    Portability is the ability for an individual to take their contributions and investments with them wherever they may go, whether across state lines, organizations, or sectors.

    Traditional pension benefits aren’t portable. When a teacher moves to a new state, her previous service years don’t automatically rollover for free. Instead, she starts back at zero. 

    Moreover, once a teacher leaves the state retirement system, her pension benefit stops growing. A teacher’s pension is a fixed, defined future benefit, and bears no direct relation to a teacher’s employee contributions. This amount is locked and she cannot continue to grow it once she leaves the system. Whether the market booms or plummets, the teacher will get the same pension benefit at retirement. 

    For example, consider a 25-year-old teacher who teaches for 15 years and then moves to another state at age 40. Her pension is calculated based on her final salary when she leaves; this amount remains fixed. But she cannot collect this benefit right away. Instead, she has to wait another decade or two until she reaches the plan’s predetermined normal retirement age—usually around age 60 to 65. 

    And that creates a problematic time gap. The teacher’s already meager pension benefit is not growing and is instead eroding away with inflation. Most states will add cost-of-living adjustments once she begins collecting her pension, but not before then. In the meantime, she could have been investing this money elsewhere and would likely come out with better gains if she had conservatively invested on her own.  

    What makes portability so critical, then, is it allows workers flexibility without these penalties. Teachers who move can “buy” service credits that count toward their new pension; but, this can end up being costly and won't necessarily make up for lost years. In the private sector, workers can continue to invest and grow their contributions until they officially retire, regardless of whether they move across companies or state lines. Teachers, as one of the largest class of workers with a college degree, should be afforded this flexibility also. 

    Note: Under this system, second-career teachers who begin teaching at older ages are actually better off because there isn’t as much lag time between the time they leave and when they retire.

  • Despite the conventional wisdom, there’s very little evidence that current education policies are driving teacher turnover. In fact, although the teacher turnover* rate rose in the 1990s and 2000s, more recently it's started to fall. This change can be traced to changing demographics of the teacher workforce as a whole.

    To understand how these trends are shaping the teacher workforce, let's start with the overall national data. The graph below comes from a post I wrote last fall showing national, longitudinal data from the National Center for Education Statistics (NCES). It tracks the percentage of teachers in a given year who leave the profession. As the arrows show, there was a general upward trend through most of the 1990s and 2000s, but that trend has reversed in more recent years:

    What was behind the rise in teacher turnover in the first place? It can't be blamed on policy changes like No Child Left Behind (NCLB) or Common Core or teacher evaluations, because the upward trend predates all of these policies. The conventional wisdom on NCLB in particular is contrary to what the evidence actually says. But what about more vague concepts like "respect" for teachers? That's harder to pin down, but there's no evidence there was ever some sort of golden era where America teachers received the respect or pay they deserved. 

    The simpler, more plausible explanations for the changes go back to human nature and demographics. After all, teachers are human, and they tend to behave like all other workers. Turnover tends to rise during economic expansions, when employers are hiring, and it falls during recessions, when hiring dries up. Worker life cycles matter as well. Inexperienced workers, including teachers, tend to have higher turnover rates, and so do older workers approaching retirement. All else equal, a less experienced, older workforce is likely to have higher turnover rates overall, even if retention rates for particular groups of workers stay exactly the same. 

    The teacher workforce has changed in exactly these ways. As Richard Ingersoll has documented, today’s teaching workforce is both “greener” and “grayer” than it was in the past. That is, the teacher workforce became both older and less-experienced than it had been. These alone are conditions that would cause overall turnover rates to rise.

    But there's even more going on underneath those broader trends. Turnover rates for inexperienced teachers have been falling, not rising, while turnover has risen among more experienced teachers. The graph below shows the change in turnover rates from 1987 to 2012 by years of experience. The turnover rate for teachers with 1-3 years of experience fell by 1.2 percentage points during this period, whereas the rate among teachers with 20 or more years of experience increased by 4.8 percentage points.

    In terms of annual turnover rates, teachers with 20 or more years of experience are now the most likely group of teachers to leave. From 1987 to 2012, the turnover rate for this group rose from 6.6 to 11.4 percent, compared to the overall change for all teachers from 5.6 to 7.7 percent.

    Most of this is due to retirement, because similar turnover patterns emerge when looking at teacher age. Over the last 15 years, the only age group of teachers with rising turnover rates is those over the age of 50. In its regular teacher surveys, NCES asks departing teachers why they are leaving the profession, and the percentage of those teachers identifying retirement as their next destination has risen from 24.8 percent in 1988-9 to 38.3 percent in 2012-13.

    This reflects both an aging teacher workforce and a reduction in the age at which teachers can retire. As Ingersoll notes, our teacher workforce was “graying” for most of the last 25 years, driven both by existing teachers aging into the profession and an increase in the hiring of older “new” teachers. A large group of older career-switchers entered teaching in the late 1980s, and the result is the chart below. It comes from Ingersoll’s report, and it shows the percentage of teachers who are age 50 or older (the chart includes public and private teachers, but private school teachers tend to be much younger, so a similar chart for public school teachers only would likely be even higher). As the chart suggests, we already passed a peak in the “graying” trend, which may be one reason overall turnover rates have started to fall. 

    It’s also no coincidence that the “graying” of the teacher workforce roughly corresponds with the rise of the Baby Boom generation. It shouldn’t be a total surprise that we’d see large numbers of teacher retirements as this generation ages out of the teaching workforce. (If you want to see this visually, check out these graphics from my colleague Leslie Kan on changes in Illinois’ teacher workforce. The retirement of a large cohort of veteran teachers is clearly visible in the graphs.)

    This period also coincides with states lowering their retirement ages. From the 1980's to the early 2000s, the median state lowered its retirement age for teachers from 58 to 55. Veteran teachers have invested nearly a full career in teaching, and teacher pension benefits tend to increase steeply as teachers approach retirement age. Evidence from California and Missouri suggests teachers know about these late-career pension incentives and act accordingly. 

    So while it may be tempting to blame teacher turnover on current education policies, demographics and rising retirement rates offer a more plausible explanation.  

    *Throughout the post I refer to "teacher turnover" as the percentage of teachers who leave the profession in a given year. This is what NCES calls the "leaver" rate. Another group of teachers move between schools. That churn certainly has a real effect on schools, but what I'm interested here is teachers who actually leave the profession altogether. 

  • Teacher pension plans are extremely back-loaded. They offer short- and medium-term workers--the majority of all teachers--very little in the way of retirement benefits. 

    The graph below shows an example of how retirement benefits accumulate under a traditional pension plan. For a teacher who begins her career at age 25, she won't have much in the way of retirement savings for the first 10 or 20 years of her career. Then, if she's still teaching, her pension benefits will escalate quickly as she nears the state's normal retirement age (in this example, it's 60.) After age 60, her pension benefits will actually start to decline, because every year she continues teaching is a year she won't be drawing her pension. The pension plan will give a strong financial "push" for teachers to leave teaching. 

    This arrangement is bad for all teachers because it leaves them without sufficient retirement savings for long stretches of time. Half of all teachers won't qualify for a pension at all, and another group of mid-career teachers will qualify for only a meager pension. Only a small fraction will reach the back-end and truly maximize their pension. 

    But this arrangement is particularly bad for groups of teachers with high turnover rates. That includes urban and rural teachers, teachers in certain subject areas, and teachers in charter schools. 

    Charter school teachers are some of the biggest losers under current pension plans, because very few charter school teachers have worked long enough to qualify for the back-end benefits offered by traditional pension plans. The chart below compares experience levels in charter schools versus traditional public schools. The data come from the 2011-12 Schools and Staffing Survey, and they show the charter sector as a whole has teachers with significantly less experience. About half of all charter teachers had five years of experience or less, and two-thirds of charter school teachers had 10 years or less. In contrast, traditional public schools had three times more teachers with 20 or more years of experience, and almost four times as many teachers with 25 or more. In other words, few charter school teachers have accumulated the experience necessary to claim the real rewards from state pension systems. 

     

    Charter schools are still relatively new, so some of these disparities may be due to the fact that charter school teachers haven't had enough time yet to age into the profession. But charters also have higher annual turnover rates, suggesting that fewer of their teachers will ever truly benefit from existing pension systems. And, in the meantime, charters are on the hook for paying off large legacy costs of accumulated pensions debts. These legacy costs are so high today that new teachers will never accumulate benefits worth more those contributions. This is true for all teachers, not just charters, but charters participating in pension plans will have to contribute the same amount as all other schools, even if their teachers aren't benefitting and they weren't responsible for the accumulated debt.

    In other words, pension plans should thank charter schools for subsidizing their past debt. Meanwhile, charter schools should think about how to provide retirement benefits that more closely match their workforce. 

  • How has the Illinois educator workforce changed over time?  Illinois' average years of experience has held roughly constant at 13 for the past decade. But while the average stayed about the same, there were significant changes going on underneath. The images below show how the shape of Illinois’ educator workforce experience has fluctuated over time (skip to the bottom of this post to see the full gif).

    The following data comes from a longitudinal dataset that Chad Aldeman, Melissa King, and I compiled from the Illinois Teacher Service Records (now known as the Employment Information System). Since 2001, the Illinois State Board of Education has been publishing annual information describing characteristics of all teachers, principals, and other school support staff employed in Illinois public schools. The majority (85 percent) of the sample are teachers. 

    On the front end, Illinois' new hires fluctuate based on district hiring practices. You can see this in the first peak in each of the graphs below, for the years 2003 and 2005.

    When districts hire more people, the graph picks it up as a noticeable peak at the front end. When hiring falls, the peak gets shorter and spreads further to the right. This is the natural effect of slower hiring rates, and shows how employees start to age into the workforce and gain more experience. 

    There's a second distinct peak in the graphs, a group of educators with 20-30 years of experience. This bulge likely represents Illinois educators from the Baby Boom generation.  

    Notice how the second peak bulges and shifts right as these teachers remain in the workforce and approach what will likely be full-career pension benefits. 

    By the end of this time period, this second bulge begins to shrink as these Baby Boom teachers begin to retire and leave the workforce.

    Here is the full gif of Illinois’ workforce from 2002 to 2012.  Again, remember that the "average" years of experience stays nearly constant through all these years, but the overall pattern shifted. Watch how the state's school districts changed their hiring patterns through the years, and how a large group of Baby Boomers slowly began to age out of the workforce.  

     

     

  • According to an L.A. Times story earlier this week, a Los Angeles charter school is trying to avoid retiree healthcare costs by paying its veteran teachers to leave the school and return to the Los Angeles Unified School District (LAUSD). El Camino Real Charter High School is offering its veteran teachers up to $30,000 if they retire with the district rather than the charter school.

    There’s clearly something unsettling about the incentives here, and the story spurs several questions around benefit accessibility, cost, and responsibility:

    • How well is the current retiree healthcare structure actually benefitting employers and employees? El Camino Real is acting in its own financial interests by offering buyouts, but it also suggests that the financial incentives have become so bad that they’re willing to pay their most experienced teachers to leave.  LAUSD may attract these veteran employees, but then will need to foot the bill for retiree healthcare benefits (and pension contributions). In the article, LAUSD officials spoke about creating rules against this sort of practice. Would that restrict their ability to hire veterans? Should districts make decisions about who to hire based on retiree healthcare obligations?
    • Why was an individual charter promising retiree healthcare at all? Unlike regular healthcare costs, which are somewhat more predictable—they may rise in a given year, but are still a function of the current workforce—health benefits for retirees are a long-term obligation. In that sense, they’re uncertain, because costs may balloon rapidly if retirees live longer or incur unprojected expenses. Retiree health insurance in California is currently collectively bargained at the local district level, and El Camino is just now realizing that they bargained for more than they could afford. Providing its own benefits package could distinguish the charter school, but in this instance it seems to have become more of a burden than a gain. 
    • Who should be responsible for funding retiree healthcare? LAUSD is a larger school district and can presumably better cover the uncertain costs than an individual charter school. The state may be even arguably better equipped to fund benefits. CalSTRS, the state pension system, has decided not to wade into retiree health insurance, and says it may consider financing retiree health benefits if the funding becomes available (but this seems unlikely). Having a state provider could centralize retiree health benefits and prevent smaller school districts or charters from having to fund benefits on their own.
    • But it could also make things more complicated. While not on the same scale, retiree healthcare faces similar underfunding issues as pension benefits. And the state is already saddled with massive unpaid pension debt, now totaling $74 billion.
    • The other elephant in the room is to what extent retiree healthcare coverage should be a part of a teacher’s compensation package. For better or worse, most employers don’t offer any form of retiree health benefits; workers need to independently figure how to afford health care in retirement, usually through a combination of private insurance and Medicare.   

    This story seems to spur more questions than answers, but it’s a signal of a strange set of incentives that California has created for its teachers and schools.  

  • Consider two hypothetical teachers with nearly identical resumes:

    Ms. Early is 65 years old, and she taught for 20 years in our public schools. She began her career at age 25, but by 45 decided it was time to try something else. At the time she left teaching, her salary was $33,086, the equivalent of $50,000 today. She's now ready to retire and, because she taught for 20 years, she's eligible for a pension that will be paid out in monthly installments for the rest of her life. Her pension formula will be based on her years of experience (20) times a multiplier factor (2 percent) times her annual salary of $33,086. Her pension will be worth $13,234 a year.

    Like Ms. Early, Ms. Late is also 65 years old, and she also taught for 20 years in our public schools. But Ms. Late tried various other careers before trying her hand at teaching at age 45. Her salary this year, her last year of teaching, was $50,000. She's now ready to retire and, because she taught for 20 years, she's eligible for a pension that will be paid out in monthly installments for the rest of her life. Her pension formula will be based on her years of experience (20) times a multiplier factor (2 percent) times her annual salary of $50,000. Her pension today will be worth $20,000 per year.

    These two teachers are identical in all ways except for one critical difference: the age at which they began teaching. And yet, that difference will mean Ms. Late will qualify for a pension that's 50 percent larger than Ms. Early's. Over a full retirement--65-year-old women today are projected to live another 21.5 years, on average--Ms. Late will qualify for retirement benefits worth almost $140,000 more (in today's dollars) than Ms. Early.

    The explanation here is pretty straightforward. In every state, a teacher's pension amount is based on her final salary in the last year she worked, regardless of when that happened to be. (Social Security, in contrast, automatically adjusts prior years' earnings.) This is a key reason why teacher pension plans are so back-loaded, and it means that pensions reward later-career service much more heavily than early-career service.

    This situation becomes even more pronounced when looking at teachers with shorter careers. Instead of two hypothetical teachers, each working 20 years, imagine four teachers who each teach for 10 years. One teaches from age 25-35, a second from 35-45, a third from 45-55, and a fourth from age 55-65. All four teach the same number of years and earn equivalent salaries (in present dollars). But because of this timing issue, the fourth teacher would qualify for a pension worth more than twice what the first teacher would earn.

    All of this creates some strange risks and rewards. Teachers who start at younger ages have the potential to earn much larger pensions by the time they retire, but, because they have more years to go, they're also much less likely to make it that long. Younger teachers also face different calculations about what to do with their pension. For a 35-year-old leaving the profession, it may make sense to cash out a pension and roll it over into some interest-bearing savings. Otherwise, the money will just sit there and not earn interest. For someone closer to retirement, the pension may be a better deal. Teachers must know how pensions work in order to maximize their retirement saving in their unique situations. 

    From a public policy standpoint, it doesn't make a whole lot of sense to prioritize one year of teaching over another. But that's exactly what teacher pensions do. 

    Want to learn more? Take three minutes out of your day to watch the explainer video below: