Teacher Pensions Blog

  • In an article last week, The New York Times argued that the teacher pension system in Puerto Rico is little more than a legal Ponzi scheme. Virtually all of the contributions made by current teachers go to pay retirees because the system will be bankrupt next year. These younger teachers are paying for other people's retirement, but they can’t count on a pension of their own when they retire.

    Simply put, Puerto Rico’s pension system is an accelerated example of pension problems in the rest of the country. Puerto Rico's finances are in even worse shape than the systems in Illinois or New Jersey. The problem of young teachers’ cross-subsidizing retirees at their own expense is even more pronounced there. But the pension crisis in Puerto Rico is where many states are headed if they don’t make reforms now.

    Evidence that teacher pension funds have problems is growing. Media coverage of the issues is expanding. Yet, many teachers still are unaware that pension systems are struggling financially and failing to provide most teachers with a good retirement benefit.

    In their defense, when I was teaching I was only vaguely aware that I was earning a pension. And to be honest I had no real sense of how the system worked. It turns out that even 30-plus year veteran teachers can be confused by complicated teacher retirement systems. 

    To help clarify these complicated issues, the Times also published a series of graphics that shed some light on teacher pensions, document the latest research, and explain how many of the current state systems truly fail to provide teachers with a valuable retirement benefit.

    Citing research from us here at Bellwether and the Urban Institute, the Times piece provides two graphics demonstrating just how long it takes for teachers in every state to “break even.” For example, it takes teachers in Ohio 35 years of working in the classroom before they break even and earn a pension that is as valuable as their own contributions.  

    Finally, they show the percent of teachers in each state that will actually ever reach their break even point. It’s not pretty. The majority of states operate teacher pension systems that do not work for the bulk of their teachers.

    These problems won’t fix themselves overnight. But, reporting like this will help to elevate the issues, show teachers just how poorly they’re being served, and hopefully lead to important reforms and retirement plans that better meet the needs of all teachers.

  • The Chicago Board of Education recently sued Illinois Governor Bruce Rauner, claiming that the way Illinois funds its schools violates the state constitution and effectively creates a “separate but unequal” system. And now, due to a massive budget shortfall, Chicago Public Schools (CPS) suggests that they may need to end the school year more than two weeks early.

    Beyond the inequity of the school finance system, the lawsuit further alleges that the teacher pension system is also at fault for treating Chicago’s students as “second-class children.”

    They’re right.

    Over the past few months I have analyzed 10 years’ of Illinois salary data precisely to determine the degree to which Illinois’ and Chicago’s teacher pension system contribute to school funding inequity.

    Although we won't release final numbers for a few weeks, the results are alarming. 

    Statewide, the schools serving the highest concentration of low-income students receive only half of the state average per-pupil expenditure on teacher pensions. And, around 60 percent of those low-income, poorly funded schools are in Chicago. In other words, the teacher pension system is compounding Illinois’ funding issues.

    Teacher pension systems compound inequitable school funding for a variety of reasons. In Illinois, the biggest problem is that Chicago operates its own teacher pension system separate and apart from the state fund. In other words, Chicago, which has the highest concentrations of high-poverty schools, receives practically no pension funding from the state. And with fewer resources and a smaller tax base at its disposal, Chicago typically contributes to the fund at an even lower rate than the state. The result is a wide disparity in school funding becomes even wider after accounting for pension spending.

    Other factors also contribute to the problem. For example, higher-poverty schools tend to have higher student-teacher ratios. They also have more new teachers (with lower salaries). Many of these younger teachers will leave before qualifying for a pension, and therefore will forfeit their state or district contributions.

    While the full findings of my study are still under wraps, the conclusions are clear: teacher pensions exacerbate school funding inequities in Illinois. Until the state fixes its inequitable school funding formula, and the pension plan that amplifies and compounds those inequities, Illinois will continue to funnel less money to the kids who need it the most. 

  • Earlier this month I was invited to speak about teacher pensions at a meeting of the Taxpayers Association of Central Iowa. Although the costs of Iowa’s pension system (IPERS) are rising, my presentation focused on the benefits side of the equation: Is Iowa’s pension plan good for the state’s teachers? Are there other alternatives that could provide better benefits? 

    My full slide deck attempting to answer those question is at the bottom of this post. I centered my presentation on three basic myths about pensions:

    1. The myth that traditional pension plans take all the risk on behalf of teachers;
    2. The myth that traditional pension plans help retain teachers; and
    3. The myth that traditional pension plans offer better benefits than alternative models.

    Like any good myth, each of these has some kernels of truths behind them, but they obscure a larger story.

    First, it’s true that pension plans do take a number of risks on behalf of workers. In Iowa, as in most other states, teachers don’t have to decide whether to save for retirement, how much to contribute, or how to invest their savings. The state takes care of those decisions for them. The state also takes care of decisions about how to draw down retirement assets. Rather than having access to one lump sum, the state pension plan issues qualifying retirees monthly checks throughout their retirement years.

    But those advantages still leave some risks on the table for Iowa teachers. Pension formulas are complicated, and teachers often make bad decisions about whether they should take a pension or withdraw their contributions. Traditional pension plans can also take on debt when their promises exceed their savings, and those costs trickle down to teachers in real ways.

    Worse, pension plans tend to be heavily back-loaded, meaning they only deliver decent retirement benefits to teachers who stay for 20 or 30 years. For a variety of personal and professional reasons, most teachers don’t stay that long. When a teacher starts her career, she faces the risk that she will need to move states and start over, or that she may just not like teaching as much as she thought she would. Pension plans leave most teachers exposed to this “attrition risk," the risk that they’ll leave before qualifying for decent retirement benefits.

    Second, there’s a myth that pensions help retain teachers in the profession. If that were true, we should see teachers changing their behavior in order to qualify for a pension in the first place. But we don’t. Iowa, for example, requires teachers to stay for 7 years in order to qualify for a pension. If Iowa teachers truly valued their pensions, we should see some fraction of 6-year veterans alter their behavior to reach the 7-year mark. But that doesn’t show up at all, even in the state’s official actuarial assumptions. Pensions do seem to help retain later-career teachers, although the existing evidence suggests that effect is limited to teachers who are very close to reaching their retirement age.

    In contrast, pension plans clearly have a push-out effect on later-career teachers. In Iowa, teachers start leaving in large numbers starting at the state’s early retirement age of 55 and accelerating at age 57. Even among Iowa teachers who make it to age 55, the state assumes only about 3 percent will make it all the way to age 65 (the normal retirement age for Social Security). When researchers have tried to weigh the balance between retention and push-out incentives in traditional pension plans, they’ve found that the push-out effect is much stronger. The truth is that states are using their pension plans to push out veteran teachers from the classroom, which has a negative effect on student learning.

    The third myth is that the existing system is the best way to deliver benefits for teachers. In fact, there are multiple ways states could structure benefits that would leave all teachers better off.

    In Iowa, I looked at three different alternatives—a cost-neutral cash balance plan, a cost-neutral defined contribution plan, and a defined contribution plan offered to Iowa state university employees. The cash balance would guarantee all teachers a pre-determined rate of return—5 percent in this example—and provide a steady accrual of retirement benefits rather than the current back-loaded system. I also modeled two different defined contribution plans, one using Iowa’s current teacher pension contribution rates, and the other using the same contribution rates as Iowa offers to its state university employees. Ironically, Iowa is paying about the same amount for each of these last two plans (contributing a total of 15 percent of salary), but the difference is that the teacher plan has debts, while the state university plan does not.

    Most teachers would be better off in one of these alternative plans. Depending on the plan, between 73 to 78 percent of teachers would have more retirement savings under the alternative model. In addition, because none of these alternatives would accumulate further debts, all teachers would see higher take-home pay.

    My main lesson for Iowa policymakers is that retirement plans should be for workers, not the state. Iowa’s main goal should be providing a path to a secure retirement to all of its teachers, no matter how long they choose to stay. Iowa’s current pension system isn’t accomplishing that goal, but there are readily available alternative plans that could.

    To learn more about Iowa’s teacher pension system, click through my slides below:

     

  • State-based teacher pension plans are important. They make up an enormous portion of local K-12 budgets, and the vast majority of them are underfunded. But despite their weight, or maybe as a symptom of, the intricacies of these systems can be difficult to navigate. The National Council on Teacher Quality’s recent report, Lifting the Pension Fog, works to demystify the topic. The NCTQ team, in partnership with EdCounsel, collected teacher retirement data from all 50 states and the District of Columbia. We’re eager to build on their work in a forthcoming piece; they’ve provided a lot to work with. One data point that stands out though, is rising contribution rates.

    NCTQ researchers found that just eight states have reasonable contribution rates – which they define as a combined contribution rate of 10-15 percent of salary. Unfortunately, a significant portion of pension contributions today are going toward debt costs – not to teachers themselves (see Figure 3 here). We’ve written about this before, but the short of it is that today’s new teachers are paying for years of pension system underfunding in the form of lower benefits and stagnant salaries. State pension debts are posing risks to hiring and retaining a quality teaching workforce.

    But employer contributions are just one part of the plan. The graph below shows total teacher pension contribution rates (the table at the bottom of the post has the same data in text format). The blue bars represent the employer contribution (which can come from the state, a district, or both), and the orange bars represent the employee’s share. 

    As the graph shows, the total contribution rates are daunting. The average is now 24 percent, and states like Pennsylvania, Kentucky, and Illinois are all contributing over 40 percent of a teacher’s salary into their state retirement system. Other states are heading in that direction.

    Both teacher and employer contributions have been trending upward. Since 2008, 30 states have increased teacher contributions. In 1982, only 13 state plans had employee contribution rates of 7 percent or above. Today, 29 do.

    When teachers are asked to pay higher contributions for the same benefits, that makes it even less likely that they’ll earn pensions worth more than their own contributions plus interest. That hurts new and future teachers the most. Rising contribution rates do not significantly impact teachers who were already members of the retirement system – often, they’ve already worked most of their careers under the plan’s earlier, lower employee contribution rates. It’s the newest hires who take the brunt of a higher employee contribution, all while paying off the debt costs of a plan they are statistically unlikely to benefit from.

    State

    Employer Contribution* (as % of salary)

    Employee Contribution (as % of salary)

    Total Contribution (as % of salary)

    Alabama

    10.82%

    6.00%

    16.82%

    Alaska

    17.78%

    8.65%

    26.43%

    Arizona

    11.34%

    11.50%

    22.84%

    Arkansas

    14.30%

    6.00%

    20.30%

    California

    21.41%

    9.21%

    30.62%

    Colorado

    21.94%

    8.00%

    29.94%

    Connecticut

    23.65%

    7.25%

    30.90%

    Delaware

    9.58%

    5.00%

    14.58%

    District of Columbia

    12.17%

    8.00%

    20.17%

    Florida

    6.21%

    3.00%

    9.21%

    Georgia

    14.27%

    6.00%

    20.27%

    Hawaii

    17.89%

    6.00%

    23.89%

    Idaho

    11.57%

    6.79%

    18.36%

    Illinois

    39.12%

    9.00%

    48.12%

    Indiana

    28.41%

    0.00%

    28.41%

    Iowa

    8.93%

    5.95%

    14.88%

    Kansas

    16.38%

    6.00%

    22.38%

    Kentucky

    29.755%

    12.86%

    42.61%

    Louisiana

    25.51%

    8.00%

    33.51%

    Maine

    13.01%

    7.65%

    20.66%

    Maryland

    15.79%

    7.00%

    22.79%

    Massachusetts

    17.73%

    11.00%

    28.73%

    Michigan

    25.78%

    6.40%

    32.18%

    Minnesota

    10.37%

    7.50%

    17.87%

    Mississippi

    16.65%

    9.00%

    25.65%

    Missouri

    14.50%

    14.50%

    29.00%

    Montana

    11.16%

    8.15%

    19.31%

    Nebraska

    7.25%

    9.78%

    17.03%

    Nevada

    14.50%

    14.50%

    29.00%

    New Hampshire

    15.67%

    7.00%

    22.67%

    New Jersey

    26.55%

    7.20%

    33.75%

    New Mexico

    16.78%

    10.70%

    27.48%

    New York

    11.72%

    4.50%

    16.22%

    North Carolina

    8.47%

    6.00%

    14.47%

    North Dakota

    13.04%

    11.75%

    24.79%

    Ohio

    14.00%

    14.00%

    28.00%

    Oklahoma

    13.11%

    7.00%

    20.11%

    Oregon

    31.26%

    6.00%

    37.26%

    Pennsylvania

    30.03%

    10.30%

    40.33%

    Rhode Island

    23.13%

    3.75%

    26.88%

    South Carolina

    11.09%

    8.66%

    19.75%

    South Dakota

    4.74%

    6.00%

    10.74%

    Tennessee

    9.04%

    5.00%

    14.04%

    Texas

    7.92%

    7.70%

    15.62%

    Utah

    23.31%

    6.00%

    29.31%

    Vermont

    13.63%

    8.53%

    22.16%

    Virginia

    16.32%

    5.00%

    21.32%

    Washington

    14.78%

    5.95%

    20.73%

    West Virginia

    24.32%

    6.00%

    30.32%

    Wisconsin

    6.85%

    6.80%

    13.65%

    Wyoming

    9.38%

    8.25%

    17.63%

     

    * For consistency, we use NCTQ’s data and definition here -- these rates are actuarially–required contributions (ARC), which may differ from what employers do in fact contribute. Several states also have legacy costs associated with closed pension plans: Alaska, Indiana, Oregon, Utah, and Washington. These states are paying down debts associated with inactive plans. Finally, Michigan and Nevada did not report the normal costs in their most recent valuation reports. For these states, NCTQ uses the same rates that were reported for 2014.

  • When they signed-up, teachers were promised a pension when they retire. It was part of the deal. But since states have long-ignored their fiscal obligations, pension funds carry significant unfunded liabilities, threatening their ability to fund teachers’ retirement. It makes sense that teachers, and particularly their unions, want to fight back.

    But is fighting to protect the existing pension plans in perpetuity the right thing to do?

    On Saturday at the National Education Association’s (NEA) Leadership Summit, John Jensen, the Vice President of the Retired Executive Council of the NEA, will lead a break-out session on the “bogus” research attacking teacher pensions and how to defend against it. And in the interest of transparency, we, as well as The Laura and John Arnold Foundation (one of our funders), are among Jensen’s list of “faux researchers.”

    If his presentation at the Summit last year is any indication, this session will deal less with research and more with ad hominem attacks. But ignoring the evidence will only serve to harm the very teachers he seeks to protect.

    There is considerable and growing evidence that 1) at least half of teachers today will not qualify for even a minimum state pension benefit; 2) state pension funds now carry roughly $500 billion in debt and are eating up larger and larger shares of teacher compensation; 3) most teachers would have a more valuable retirement if they participated in a traditional 401k plan; and, 4) today’s teachers, to their own financial detriment, subsidize the pension of currently retired teachers.

    Let’s tackle these issues one at a time.

    1. Nowadays teachers do not spend the whole of their professional lives in schools. In fact, the most common years’ of experience for teachers nationally is around 5 years. This has serious retirement implications. Since the majority of state pension plans have overwhelming amounts of debt, states have raised their vesting periods as a cost savings measure. All of this means that at least half of new teachers will not ever receive a pension. And, when they do leave the classroom it is only with their own contributions (often earning very little interest), and many teachers don’t even earn Social Security during their tenure.
       
    2. States are crippled with teacher pension debt. To be clear, this is not teachers’ fault. Rather, states didn’t make sufficient investments and the funds often had lackluster returns. As a result, districts on average now spend $2,500 on employee benefits. And pensions alone comprise over $1,000 of that. This means that – baring a huge reform – teachers today are paying for the pension of current retirees even though they themselves will likely never receive a pension anywhere near as generous when they retire.
       
    3. Since most teachers won’t teach for their entire career, a defined contribution plan such as a 401k or 403b would actually produce a more valuable retirement benefit. Due in part to cross-generation subsidization, it takes a 25-year-old teacher decades before her pension is more valuable than her own contributions, or what she could have earned from a DC plan. Pension plans are designed to convey valuable benefits on people who stay in their careers for thirty years or more. And they do. But, they do so at the expense of the majority of teachers.
       
    4. Pension funds work kind of like insurance, where one group subsidizes the other. In the case of teacher pensions, the contributions of short-term teachers’ pay for the retirement of longer-term ones. This would be ok if all teachers taught long enough to reach the point when their pension is sufficiently valuable. But that isn’t the case. Instead, short-term teachers incur significant financial losses to pay for pensions that they will never receive. A recent analysis of the massive pension fund in California (CalSTRS), reveals that roughly two-thirds of California’s teachers are pension “losers” because of this. Additionally, newer teachers have the burden of paying for past pension debts.

    Despite what the NEA says publicly, the fact is teacher pension systems are in need of reform to better meet teachers’ retirement needs. Shifting to provide new teachers with the option of investing in a 401k for their retirement won’t solve all of the teacher pension woes. The question remains of how will states pay for their existing pension obligations. That will likely take a lot of innovative thinking and some difficult sacrifices from taxpayers, and likely teachers themselves. But to be sure, new teachers shouldn’t have to shoulder the pension costs of retired teachers, particularly when the funds may not be around to support them when they leave the classroom.

  • Over the last 20 years, per-pupil spending has more than doubled. Alarmingly, however, school district spending on employee benefits grew even more quickly. Now, over 22 percent of per pupil spending goes toward benefits payments. In other words, on average 20 cents of every dollar a district spends goes to teacher pensions and other benefit obligations.

    As shown in the graph below, the average district per-pupil expenditure on benefits increased from $763, or approximately 15 percent of all spending in 1992 to $2,524, or 22.9 percent of district spending in 2014. The increased district spending on employee benefits eats away at teacher salaries and other education investments. 

    The current structure of teacher pensions are responsible for a lot of the increased spending on employee benefits. In fact, over $1,000 per pupil is spent nationally on teacher pensions. States, and to a lesser extent districts, have spent decades kicking the can on their pension obligations. And as a result many pension funds now carry billions of dollars in unfunded liabilities forcing them to allocate more money to pay off their debts. Without a corresponding increase in the overall education budget this necessarily means that benefits eat away at other education spending.