Blog: Pensions and Human Capital

Late-career teachers need to retire at a specific year in order to reach peak lifetime benefits.
Highlights from the New Jersey pension reform proposal.
More new teachers are staying in the classroom after five years. Despite the recent uptick, teachers who stick around for a fifth year are still not going to be rewarded with a substantial pension.

The National Council on Teacher Quality (NCTQ) released a report grading each state’s teacher pension system. Based on data collected since 2008, NCTQ grades each state’s teacher retirement plan on three components:

  • Plan funding and sustainability. Collectively, state pension plans face a $1.4 trillion shortfall, with teacher pensions alone accounting for $500 billion in unfunded liabilities. For every dollar contributed to state teacher pension plans, an average of $.70 goes toward paying down the pension debt (rather than benefits for current teachers). NCTQ urges states to more responsibly manage their pension debt.    
  • Flexibility and portability. Teachers who leave before vesting do not qualify for benefits, and over half of teachers won't vest into their state's pension system. Non-vested teachers receive a refund on their contributions and sometimes interest, but rarely receive any portion of their employer contributions. NCTQ recommends a vesting period of three years or less and that plans allow non-vested teachers to keep a portion of their employer's contributions.
  • Neutrality. Pensions benefits are heavily back-loaded where teachers accrue substantial benefits in their later career years. NCTQ recommends that states design plans that allow teachers to accrue benefits uniformly for each year of work, treating early and later career teachers equitably. 

Amongst the high performers, NCTQ graded Alaska and South Dakota with top grades:

  • Alaska was the only state to earn an “A” grade. Alaska provides teachers with a fully portable, defined contribution retirement plan. The plan allows teachers to vest immediately on their own contributions. Vesting on employer contributions is graduated (25 percent after two years, 50 percent after three years, and 75 percent after four), with full vesting after five years.

  • South Dakota received a “B+” grade for its low vesting requirement (three years) and portability. Teachers who leave before vesting can withdraw their contributions, interest, and a 50 percent match on employer contributions

On the other hand, amongst the low performers: 

  • Mississippi received a failing grade. Poor-funding, high vesting requirements (eight years), and high employee and employer contributions rates make Mississippi a poor system for teachers and taxpayers. 

Charters are finding innovative alternatives to traditional pensions, offering teachers portable benefits and/or reallocating funds for other forms of compensation.
Teachers need stable retirement benefits that they can take with them wherever they go.
Read our new report about teachers without Social Security coverage.
Longer life expectancies mean states and districts will likely face higher retirement costs in pension benefits, but also means retiring later.
Teacher pensions have a similar effect on worker retention as the pensions offered to military members.
Military pensions do not distribute benefits equally and severely shortchange the majority of members. The Department of Defense is now considering switching to a hybrid model.