No offense intended, but actuaries typically are not the bearers of good news. Broadly speaking, actuaries are the people who count money and warn about a rainy day. While most policymakers and CEOs don’t like seeing them coming, actuaries perform a critical function and help ensure that governments, companies, and other entities have enough money set aside for future costs or unexpected expenses.
A recent, one-of-a-kind study from the Society of Actuaries presents a mixed bag: good news for some, and greater expenses for others. After studying more than 100 public retirement systems from 2008 to 2013, across 46 million life-years, they found that teachers have the longest life expectancy of all public employees. Over this period, female teachers on average lived to be 90 years old, and the typical male teacher is expected to live till they’re 88.
Great news, right?
For teachers, absolutely. These findings suggest that in general teachers enjoy a comfortable retirement with sufficient financial support. The fact that most teachers will live into their ninth decade is particularly encouraging given that the average American life expectancy fell for three consecutive years.
Living longer, however, carries consequences for states. Approximately 90 percent of teachers are enrolled in state pension systems. This means that qualified retirees earn an annual pension benefit that is derived from a number of factors, such as years of experience and their final salaries, and a teacher pension is a lifetime benefit. In other words, unlike a 401k, an individual’s pension cannot run dry. The state is obligated to pay the annual benefit for each year of the retired teacher’s life.
Thus, the longer a retired teacher lives, the more valuable their pension becomes. This carries serious implications for state pension funds. These funds, relying on the help of actuaries, base their funding levels, at least in part, on life expectancy estimates. If states are using outdated data or less optimistic life expectancy tables, then they’re likely underfunding their pension systems. In addition to the longstanding tradition of state legislatures simply not providing the actuarially determined level of funding necessary for their pensions to keep up with their obligations, this would mean that even the level of financing recommended by the actuaries may have been too low.
With virtually every state facing a teacher pension crisis, it is vitally important that state pension systems have an accurate picture of their retiree’s life expectancy. While it is likely that the conditions will vary, states should carefully assess their life expectancy estimates and, as necessary, realign their funding levels so they can meet their obligations over a longer term than they may have anticipated.
The following is a guest post from Ryan Frailich, a Certified Financial Planner. He started his career teaching in Mississippi, before moving to teach in New York City and then New Orleans. In the first decade of his working career, Ryan ended up with one state pension and three different 403(b) plans. Upon researching his situation and learning more about the state of retirement for teachers, Ryan switched careers and then became a financial planner with a focus on helping young couples and educators plan for their financial lives.
The chart below is something everyone “knows,” but most people forget about for 99 percent of their lives. Inflation, a concept all of us are exposed to in high school economics class, is the slow moving force behind those stories your grandfather told you about going to the movies for 25 cents, or buying a bottle of coke for a dime. Yet when it comes to the impact on teacher’s retirement plans, people are in the dark.
Teacher pensions are a struggle to write about because there’s a chasm between what’s promised and the outcomes for the overwhelming majority of teachers. I believe all teachers should get the benefits promised to them, but here in the real world, we have to face the fact that the commonly held notion of a teacher working 30-35 years and retiring with a gold plated pension is largely fiction. The small number of teachers who actually reach breakeven has been widely covered, not to mention the even tinier fraction of beginning teachers who actually reach full retirement age. Setting aside those issues for a moment, let’s take a look at what happens to a teacher who starts in a retirement system, spends 30 years in it, and retires.
I’m in Louisiana, so let’s take a teacher who started in 2018 in the Baton Rouge schools. Let’s call this teacher James. James is 22, right out of college, and the starting salary for a brand new classroom teacher is $44,500. James stays in the district his entire career, earns a Master’s degree along the way, and retires 30 years later with a peak salary of $67,200.
Using the Teacher’s Retirement System of Louisiana’s pension calculation, we calculate his benefit the year after he retires as follows:
Years Worked * Pension Multiplier * Highest three years average salary
30 * 2.5 * $66,200 = $49,650
Wow! He can stop working and go on collecting $49,650 from age 53 until whenever he passes away. Or can he?
Enter the inflation monster.
History isn’t entirely predictive, but let’s use historical inflation to see what happens to the real dollar value of James’ pension over time. The consumer price index rose 2.54 percent per year, on average, from 1988-2018, so we’ll use that as our estimate of the next 30 years.
Technically, TRSL offers a cost of living adjustment that can be about 1.5 percent per year, so we’ll factor that in for now. As we’ll get to later, that’s another one of those things that’s promised on paper until you read the fine print.
With the numbers cited above, the table below captures the current value of his pension at ten year increments into the future.
Ugh. Now, at 82 years old, James has to find a way to make up for the fact that his pension has lost 26.3 percent of his purchasing power to inflation since he retired.
The above assumes that TRSL awards that 1.5 percent cost of living increase every year, but historically that hasn’t been the case. TRSL has rules governing when a cost of living increase can be awarded, and those rules are incredibly complex, but essentially hinge on 3 things:
The funded ratio of the plan
The past year’s investment returns &
approval from the state legislature.
Translation: It’s not happening annually. In 2016, Louisiana teacher retirees got their first cost of living adjustment in eight years, and it was 1.5 percent. If we know his pension loses 26 percent of its value while getting a yearly cost of living adjustment, imagine how bad it looks if he only gets one every eight or so years.
This scenario I’m presenting is, in all reality, the best case scenario for many teachers in Louisiana. There are a variety of other scenarios in which the payout looks even worse.
It’s worse because whatever meager Social Security a teacher in Louisiana may be eligible for would get reduced due to the windfall elimination provision. I say meager because years spent teaching in Louisiana are years not spent contributing to Social Security, so career teachers may only have sporadic income from college or post retirement to earn Social Security credits.
It’s worse because just over one quarter of teachers who enter the system even get to the roughly 20 years required to break even, adjusted for inflation, on their own contributions. And if you leave the system, the amount you can withdraw and put in your own IRA has sat, uninvested, without interest, for years.
It’s worse because if you decide to leave your contributions with the state of Louisiana, and draw your pension in the distant future, inflation erodes it all along the way. Say James stops teaching after 15 years and changes careers, but wants to draw his pension. The pension won’t be accessible for him until age 62 (age 60 for some retirees). Those 24 years of inflation at 3 percent leave what would’ve been an annual payment of $19,331 worth just $9,306 per year.
It’s worse because the Louisiana pension has been underfunded for years, so at some future, indeterminate point, it’s possible the benefits that do exist will be reduced.
If one of the best outcomes for a new teacher entering the system is one in which their pension payout loses 26 percent of its value over a 30 year retirement, then thousands of teachers get even worse.
What You Can Do About It
There are a host of policy changes I’d love to see, but for this article, let’s stick to what’s in your control.
- Max out a ROTH IRA. I encourage all teachers to contribute to a ROTH IRA, and work to max out the annual limit whenever possible. This will give you a post-tax pot of money to draw on and supplement your pension in retirement years.
- Use the 457 or 403(b) Plan (with caution). Most districts have either a 403(b) plan, a 457 plan, or both. These are retirement plans that allow you to put much more money in each year than an IRA. But use caution because 403(b)’s are rife with horrendous investment options and investment fees I wouldn’t wish upon my worst enemy. Do your homework before committing to one of these plans, but when you find a good one with reasonable fees and adequate investment options, it will provide a tool to start building money you can rely on if your pension falls short of fully meeting your long term needs.
- Adjust your expectations. New teachers need to go in with eyes wide open, and know that the odds are against them in getting the gold plated pension. Being clear eyed about this helps people know well in advance, and better prepare for it.
- Decide on a career path early. This is hard because my advice is to decide in the first few years of your career whether you’re going to stick with it for the long haul or not. That is obviously easy to say but much harder to implement given all the life variables that come peoples way. That said, if you are going to make a full 20+ year career of teaching in one state, you’ll do okay with your pension. If you work 2-4 years and move on, the decision to withdraw your contributions and invest in an IRA is easy. The challenge is hardest for people who have 8-15 years in the system, and either way they choose comes with significant downsides.
To me, it’s a shame that so many teachers will end up having inadequate resources to retire on. If I could wave my magic wand and give teachers a pension option that met the needs of the majority of teachers, I would do it in the blink of an eye. Teachers deserve better than the disjointed, underfunded, and inadequate system most have access to.
Barring any unexpected developments, teachers in Oakland Unified School District (OUSD) in California are set to go on strike this Friday. Much like their colleagues in Los Angeles Unified School District (LAUSD), Oakland’s educators are seeking a pay increase and smaller class sizes.
Based on data from the California Teachers Association, it looks as though Oakland’s teachers may have a case. OUSD offers a lower beginning salary compared with other districts in California, as well as lower salaries on average and at retirement. As such, the Oakland Education Association (OEA) is demanding as 12 percent raise over three years. These numbers are double the union’s ask in LAUSD earlier this year, but mirror the demand in Denver.
Whether the raise is warranted or not, it will be difficult for OUSD to afford it given that it faces a more than $20 million budget shortfall. Due to their budget constraints, the district has offered only a 5 percent salary increase.
While Oakland has seen increases in per pupil expenditures over the past three years (see slide 20), increases in benefit spending far outpace the growth in overall K-12 spending or teachers’ base salaries. To demonstrate this, I created the graph below using data from the U.S. Census Bureau. From 2001 to 2016, Oakland increased its current per pupil spending by 39 percent and salaries and wages by only 19 percent. The district’s benefit spending, however, skyrocketed by 127 percent. In other words, Oakland’s spending on employee benefits increased nearly 7 times faster than its spending on salaries and wages.
Due to the state’s more than $107 billion unfunded liability, the California pension system has undertaken serious contribution hikes that affect teachers, but really squeeze district budgets. As my colleague Kirsten Schmitz demonstrated, by 2021, nearly 40 percent of teacher salaries will go to benefits and the brunt of the burden will be borne by districts. Districts will pay 19.1 percent of teacher salaries to benefits, an increase of more than 130 percent since 2014. And to make matters worse, the majority of these new funds are earmarked to pay down debt rather than funding actual benefits. Indeed, most incoming California’s teachers will never even see a pension benefit and instead are simply subsidizing retirees and a relatively small number of long-term teachers.
Oakland’s teachers are understandably concerned about their base pay. And while it likely won’t garner the same attention as the salary fight, they should also be worried about rising benefit costs and the impact it has on Oakland’s education budget.
Last week the state of New York announced that, due to gains in the stock market, the employer contribution rate for its teacher pension plan, NYSTRS, would fall from 10.62 to 8.86 percent of payroll. This is obviously good news, and it will save New York school districts an estimated $300 million in the 2019-20 school year.
NYSTRS is often cited as one of the leaders in the public pension world, mainly due to its relatively high funded ratio (97.7 percent as of 2017). Unlike other states, where contribution rates are set in statute or determined annually by the whims of state legislators, NYSTRS regularly contributes exactly what its actuaries say the plan needs.
And yet, there are problems with this model too. As this excellent graphic from Cathleen F. Crowley at the Albany Times Union shows (I added the arrows), the downside of this approach is extreme volatility. NYSTRS' employer contribution rates have fluctuated from a high of 21 percent in 1985-86, down to less than 1 percent from 2000-3, only to rebound up to 17.5 percent in 2014-15. School districts are handed these contribution rates with no choice, and they can force significant changes to district budgets when contribution rates can nearly triple in five years' time, as they did from 2009-10 to 2014-15, or halve, as they've done since then. Districts are given a few months of advance notice--the rates for 2019-2020 were just announced, for example--but this volatility can still make for painful setbacks in some years or surprise windfalls in others.
New York's roller coaster contribution rates and high funding ratios may earn plaudits on the financial side, but they have not made the state immune to the benefit cuts affecting teachers in other states. In fact, NYSTRS has aggressively cut benefits for new workers over time, and today it operates six tiers of benefits that depend on the employee's start date. New workers hired after 2012 have the least generous benefits, followed by those hired between 2010 and 2012, and so on. New York also requires teachers to stay 10 years before qualifying for retirement benefits, a requirement that would be illegal in the private sector.
All of this should serve as a reminder that a plan's financial status may or may not have any relationship to how well it works for its members. NYSTRS has maintained its high funding ratio at the expense of both employees and employers.
- Teachers in Denver, Colorado are on the brink of going out on strike. Given last year's statewide demonstrations in Colorado, West Virginia, Arizona, and Kentucky, not to mention the recent teacher strike in Los Angeles, it might be tempting to think of Denver as just one more data point in a larger national trend of teacher activism. But Denver is different for a few reasons.First, unlike the rest of the contry, teacher salaries in Denver have been going up. Denver teacher salaries have risen 4.1 percent a year over the last five years, which is a faster growth rate than its overall per pupil spending (see data on page 27 here). The district is now proposing a further 10 percent raise, and the union is requesting a raise of 12.5 percent. Those are much larger numbers than in Los Angeles, for example, where the union ultimately agreed to a 6 percent raise phased in over two years.Second, as Rick Hess notes in an excellent piece for Forbes, the Denver debate is largely over a pay-for-performance program called ProComp that began in 2005. The district and union are not all that far apart on total spending, but the disagreement is largely about how that money is allocated and whether it should go toward base pay or incentives.Still, if I were a Denver teacher, I would be upset about the district's inability to control spiraling benefit costs. While Denver has seen revenue increases and has been able to translate a good portion of that into higher salaries, the increases to base salary pale in comparison to Denver's spending on benefits. To show what this looks like, I created the graph below using data from the U.S. Census Bureau. As the graph shows, from 2001 to 2016 Denver increased current spending per pupil by 57 percent, and it increased spending on salaries and wages by 65 percent, but its spending on employee benefits soared by 232 percent. That is, Denver's spending on employee benefits rose about four times faster than its spending on salaries and wages.Part of this is due to changes in health care costs, but the state pension plan is also a big factor. Mandatory contribution rates to the Colorado teacher pension plan doubled between 2001 and 2016, and they've continued to rise since then.In fact, in legislation passed late last spring, Colorado cut benefits for new hires and further increased employee and employer contribution rates. As I showed at the time, the net result is a dramatic decline in the value of Colorado teacher retirement benefits. The graph below shows the value of a teacher's pension under the Public Employees Retirement Association (Colorado PERA) depending on hire date. Workers hired before 2011 were placed in a back-loaded plan that required them to stay 20 or 30 years before qualifying for a decent benefit (represented by the solid black line). But the state offers worse benefits to those hired between 2011 and 2020 (the gray line), and it will offer even worse benefits to teachers hired after 2020 (the red line).To be clear, Denver as a school district has no control over the statewide pension plan. Those rules are set by the legislature and apply to all educators across the state. But Denver teachers are getting a particularly raw deal. Denver has a relatively mobile teacher population, meaning fewer of its teachers will stick around to reach the back-end peaks built into the state pension plan formulas. And given its fast-growing population, Denver will have a disproportionately large share of teachers hired into the new, worse benefit tiers.These benefit issues may not get the same attention as the fight over base salaries, but Denver residents should be concerned about how their school district's budget is being spent and how little control they have over this important part of it.Taxonomy:
Roughly 90 percent of all teachers are enrolled in a pension fund. However, each fund has its own rules and set of conditions that determine the overall value of a retired teacher's annual benefit. Interested in data on the average teacher pension in your state? See the chart below for the latest data, updating an earlier post!
The first column shows the “average pension” for newly retired teachers from the past ten years in each state. In the majority of states that don’t list the average benefit for newly retired members outright, these data are retrieved from states’ observations about retirees and beneficiaries added to the retirement plan’s rolls and about new benefit payments added to the rolls. These data are based on 2016 figures unless otherwise noted. Keep in mind that this method is not completely precise– these numbers also include beneficiaries added to the rolls because their spouses passed away, as well as potential increases in benefit payments due to inflation adjustments.
The next column shows, among all newly retired teachers, what the median retiree earns. The third column shows the average pension for all current retirees and beneficiaries. Finally, the last column show the estimated percentage of new teachers who will actually receive a pension. The data come from each state's annual comprehensive financial report.
In Maryland, for example, the “average pension” for new teachers is $24,409. But the median pension for new retirees is just $16,404, meaning half of all new retirees earn less than that amount. Moreover, 57 percent of new Maryland teachers are expected to leave the system before qualifying for a pension.
Average Teacher Pension by State
Average Benefit for New Retirees
Median Benefit for New Retirees
Percentage of New Teachers Who QUALIFY FOR a Pension
Alaska (DB plan)
Distrct of Columbia
Indiana (Pre1996 Fund)
Indiana (1996 Fund)
Minnesota (All retirees)
Washington (PERS 1)
Washington (PERS 2)
*Includes all public employees
(y) Indicates data based on 2017 figures.
Knowing what your state’s “average pension” can be interesting. But this amount doesn’t necessarily reflect the amount that many teachers actually earn. Below are four important caveats about the data you’re looking at:
- Not all teachers qualify for a pension. States can and do set relatively high minimum service requirements, ranging from five to 10 years, and over half of incoming teachers won’t qualify for retirement benefits in their state. Leaving these teachers out of the overall pool obscures who gets counted in the “average pension.”
- Of the teachers who do qualify for benefits, their benefits will vary widely. The statistical average, or mean, hides the fact that only a small percentage of incoming teachers will receive a full career pension at retirement, while many, many more get only a small amount. Also, teachers in 15 states aren't covered by Social Security; pensions in these states tend to be larger to make up for this fact.
- These amounts only tell us what a teacher earns at retirement—not what she contributed to her state or local system. The averages include many teachers who qualify for some pension, but those pensions may be worth less than the value of the teacher's own contributions.
- In many states, teacher pension plans have created newer, less generous retirement tiers for newly entering members. If you’re a new teacher and you live in a state with a tiered plan, your retirement plan could end up looking significantly more meagre than the numbers below.