NCTQ’s new report on the state of state teacher pension plans is well worth your time. If you’re new to the pension issue, it does a great job of breaking down the issues in simple and clear language. If you know your way around defined benefit plans, there’s still lots of good resources on, for example, the number of states that made changes to their pension formulas over the last four years. And, if you only care about a particular state, it has lots of tables where you can find exactly how your home state is doing.
So go read it all and save it as a resource. For this blog, I want to pull out one of its main findings and show why it matters. Since 2009, 13 states have changed their vesting requirements, and 11 of those 13 made this period longer. The vesting period is amount of time a teacher must be employed before becoming eligible for pension benefits. If they meet the minimum vesting requirement, they’re eligible for a pension. If they don’t, they typically can get their own contributions back and some interest on those contributions, but they forfeit the contributions their employer made on their behalf.
The graph below shows the distribution of state vesting requirements. In 2012, 25 states required teachers to stay in the state pension plan for at least five years before vesting, and 15 required them to stay 10 years.
With today’s increasingly mobile workforce, five or 10 years is a relatively long time to stay in one job. Many teachers will never meet their vesting requirements and will be forced to forfeit their employer’s contributions and, in many states, they will also lose out on any interest that their investments would have accrued.
Let’s use Illinois as an example of how many teachers will meet the state vesting requirements. In 2010, faced with the one of the largest pension deficits in the country, Illinois created a new, less generous pension plan for new teachers that lengthened the vesting requirement from five years to ten. Education Next ran a report from Bob Costrell, Mike Podgursky, and Christian Weller that showed how the changes will affect teachers who stay their entire career teaching in Illinois (see Figure 2 here). However, we know that a large percentage of teachers won’t ever make it to five years in the profession, let alone 10.
How many make it this far? In the graph below, I’ve included three different estimates of the cumulative attrition rate of teachers. The green line comes from the Teachers’ Retirement System of the State of Illinois. Their annual financial report estimates how many teachers will leave each year based on their experience and whether or not they have tenure. The green line shows those estimates over a 10-year period. The blue line comes from a 2003report by Richard Ingersoll which used the Schools and Staffing Survey to calculate the national attrition rate for the first five years of a teacher’s career. The data are a bit old at this point, but it’s one of the only places that has looked at attrition in this way. For our purposes, I’ve extended the line out to 10 years, using the dotted line to signify where my estimates take over. Last, the red line is a relatively rough cut from the National Center for Education Statistics, which reports that 16 percent of teachers change jobs every year (this estimate is probably too high, but it’s another data point to consider).
The left circle shows how many teachers would have met Illinois’ old pension vesting requirement of five years, and the right circle shows how many teachers are likely to make it to ten years, the new requirement. By Illinois’ own estimates, 59 percent of teachers will fail to meet the vesting requirements. Compared to three years ago, an additional 24 percent of teachers won’t meet the new vesting requirement. If we use the Ingersoll numbers, nearly half wouldn’t have met the old five-year vesting requirement, and only 29 percent will meet the 10-year requirement.
On this and other pension issues, states are moving in the wrong direction. They’re shoring up the finances of their underfunded pension plans by creating less generous plans for new workers, asking them to contribute more, and increasing penalties for mobility. Illinois has roughly 130,000 teachers. If we do some back-of-the-envelope math and average the state’s and the Ingersoll estimates together, it means that 85,000 current Illinois teachers will leave the profession in the next ten years with little retirement savings to show for their experience. To paraphrase NCTQ, few will benefit.
This blog entry first appeared on The Quick and the Ed.