Blog: Retirement Insecurity

Last week we presented our new paper, Friends without Benefits: How States Systematically Shortchange Teachers' Retirement and Threaten Their Retirement Security, at the 39th annual conference of the Association of Education Finance and Policy (AEFP).
To ensure the accuracy of pension plan assumptions, state retirement systems conduct regular “experience studies” to compare their assumptions with data about the actual numbers observed on the ground. Experience studies help ensure the accuracy of a plan by measuring any fluctuations in the field and proposing subsequent adjustments to plan assumptions. We unearthed over two decades worth of experience studies from North Dakota.
Two simple graphs show show that current teachers in Kansas City and St. Louis are poorly served by their defined benefit pension plans.
Do pensions affect teacher retention decisions? According to their own data, state pension plans say no, at least for the vast majority of teachers.
In order to cut costs and recover from the recent recession, New York City recently lengthened the vesting requirement, the time period employees need to stay in order to qualify for even a minimum pension, from five years to ten. Now, half of all new teachers in the Big Apple will not qualify for a retirement benefit.
A “crisis” is sometimes in the eyes of the beholder. The public pension crisis has a lot to do with the broader broken compact between Americans and their government over fiscal priorities. Yet again, it’s a place where public school teachers are the leading edge of the great debate about what it means to be an American.
If you follow news about the District of Columbia Public Schools (DCPS) closely, you could be forgiven if you thought teacher turnover had increased since the schools were handed over to mayoral control in 2007. But, at least according to the city's teacher pension plan, turnover hasn't increased at all; it's actually declined slightly.
Placing all workers on a path to a secure retirement regardless of tenure or when they were hired should be the principle aim of any retirement system. Unfortunately the current system falls short of this aim in most jurisdictions today.
Let’s say you are running a school district. Would you raise teacher compensation (salaries and retirement benefits) by 5-8 percent for all of those who stay less than 20 years in exchange for lowering compensation by up to 3.4 percent for 38-year veterans?

The research field of teacher pensions has been a relative backwater, but lately it just keeps getting more interesting. Yesterday, the Fordham Institute released a new paper from Marty West and Matt Chingos analyzing a 2002 policy change in Florida which allowed teachers to choose between a traditional defined benefit pension plan and a 401k-style defined contribution plan. The authors were able to track who chose which plan, what subject they taught, how effective they were in the classroom, how long they remained teaching, and whether the pension plan’s structure had any effect on retention.

Perhaps not surprisingly, they found that math and science teachers, teachers with advanced degrees, and charter school teachers were all more likely to opt for the portable defined contribution plan. These teachers may enter the profession not planning to stay for long or, in the case of charters, may anticipate switching to another school that’s not enrolled in the Florida defined benefit system (Florida charters have a choice on whether to participate or not).

Important, they did not find any differences in effectiveness between those who chose the defined benefit plan and those who chose the defined contribution plan, but they did find differences in attrition rates. Teachers who opted into the defined contribution plan were one percentage point more likely to leave before their second year and nine percentage points more likely to leave after their fifth year. This will give fodder to the crowd that claims that defined benefit plans do a better job of retaining employees than 401k-style defined contribution plans and support those seeking to preserve the status quo in most other states.

But wait, there’s more to this story. If you care at all about the thousands of teachers who will one day become ex-teachers, this paper puts numbers on just how many there are and how much money they’re losing. In the seven years of the study, Florida districts hired 92,000 first-time teachers. The authors found that roughly 40 percent of these beginning teachers stay less than six years, the amount of time Florida required a teacher to be employed before becoming eligible for pension benefits. By not meeting the vesting requirement, the authors estimate each of those ex-teachers will lose out on retirement savings of up to $27,784 in today’s dollars.

It was outside the scope of the study, but Florida recently lengthened the vesting period from six to eight years, meaning even more teachers are likely to become ex-teachers before qualifying for pension benefits, leaving even more money on the table. (See how Florida’s vesting requirements compare to other states here.)