Blog: Mobility and Portability

Pension analyses that ignore the effects on short- or medium-term workers are extremely incomplete.
A new Urban Institute brief suggests the vast majority of teachers will leave the profession with less than their own contributions.
We searched public pension plan documents to find what happens when teachers leave a pension plan. Although this this information is limited, some teachers prefer to cash out and take a lump-sum payment rather than waiting to draw a pension in retirement.
Last week I presented our work on teacher pensions at the Education Writer’s Association (EWA) 67th national seminar.
Federal and state leaders have recently proposed a variety of solutions intended to address the need for greater retirement security.
Many teachers get worse benefits than those offered in the private sector.
States have attempted to ameliorate the non-portability of pensions by “selling” service credit. Unfortunately, though, pension plans exact transaction costs on mobile teachers that significantly hamper their savings.
School administrators should warn all new teachers about the significant savings penalty they face because of high mobility rates and long service requirements to qualify for a pension.
When a teacher leaves the classroom, she may also leave the state or district retirement system. As a teacher leaves, what happens to her pension contributions?

In the late 1990s, state pension funds experienced surpluses from high returns in the stock market. Rather than prudently saving the surplus funds, many states passed legislation to enhance or increase pension benefits for public workers. 

In a recent paper, economists Cory Koedel, Shawn Ni, and Michael Podgursky analyzed who benefitted from a series of pension enhancements in Missouri in the late 1990s and early 2000s and by how much. As the authors calculate, teachers who were already well into their teaching career received benefit increases of over $100,000 in estimated pension wealth. However, to pay for the benefit enhancements and a falling stock market, Missouri has been forced to increase teacher contributions to the pension plan. That contribution increase was not enough to cancel out the benefit increase for late-career teachers, but it erased all gains for teachers who were early in their career at the time. Most importantly, because both employees and their employers were now paying higher contribution rates, it made the overall compensation structure much worse for all new teachers. That system still exists today. 

You should read the full paper, but to show the effect of the benefit enhancements for mid- and late-career teachers I created the gif below from the authors' Figure 1. It shows the changes in pension wealth for someone who began teaching in Missouri schools at the age of 25 in 1983. Her benefits improved substantially as a result of pension formula enhancements in 1996, 1999, 2000, and 2002, creating a much more generous benefit at the back end of her career. The dotted line in all the graphs is the baseline year of 1995. 

Chart: Missouri Pension Wealth Accrual Before and After Benefit Enhancements, 1995-2002

Missouri Pension Enhancements on Make A Gif

Source: Figure 1 here