It can be hard to get a handle on teacher retirement costs. Collectively, states and school districts spend about $63 billion a year on employee retirement benefits, but what does that mean for individual school district budgets?
If Mississippi leaders are looking for ways to improve teacher compensation, here’s one idea that wouldn’t cost them any money: Give K-12 teachers the same retirement plan options that faculty members at the University of Mississippi already have.
In Mississippi, both K-12 and higher education employees are automatically defaulted into the same defined benefit pension plan run by the Public Employees’ Retirement System (PERS). Members have to stay eight years to vest and qualify for a benefit upon reaching retirement age. Like other traditional pension plans, benefits are awarded through a formula tied to the member’s salary and years of service.
The standard PERS plan is quite costly to employers and taxpayers, but it’s not all that generous to members. According to the plan’s actuaries, who analyze the plan’s finances, the average member earns a benefit each year worth only 1.09% of their salary. (If that seems too low to be true, see page 11 of PERS’ latest actuarial valuation report.)
But wait, how can this be? Overall, PERS employers are contributing 17.4% of each member’s salary. Where is that money going? The difference is explained by the fact that PERS has promised benefits worth $18.7 billion more than it has saved. Like someone carrying a credit card balance, PERS has to pay down those debts, and that contribution eats 16.06% of each member’s salary.
In other words, the PERS pension plan is barely a benefit at all.
Mississippi’s K-12 employees are stuck with the traditional pension plan. But beginning in 1990, the state legislature directed PERS to create another plan. That plan, called the Optional Retirement Plan (ORP), is solely for employees at Ole Miss, Mississippi State, and other public colleges and universities across the state.
The ORP plan operates more like a 401k, where employers make contributions toward individual accounts. But unlike a typical 401k in the private sector, where employees are lucky to get a 4 or 5% match, all ORP plan members receive a 14.75% employer contribution directly into their retirement accounts.
Unlike K-12 teachers, Mississippi’s higher education faculty get to pick which of these two PERS plans best meets their needs. The traditional pension plan provides a guaranteed stream of revenue based on the benefit formula, whereas the ORP plan does not. But calculations from TeacherPensions.org suggest that guarantee is not worth that much: A PERS member would need to stay in the plan for 30 consecutive years before their pension would be worth more than their own contributions plus interest.