Blog: State Pension Plans

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

Source: Figure 1 here. 

NCTQ’s new report on the state of state teacher pension plans is well worth your time. If you’re new to the pension issue, it does a great job of breaking down the issues in simple and clear language. If you know your way around defined benefit plans, there’s still lots of good resources on, for example, the number of states that made changes to their pension formulas over the last four years. And, if you only care about a particular state, it has lots of tables where you can find exactly how your home state is doing.

So go read it all and save it as a resource. For this blog, I want to pull out one of its main findings and show why it matters. Since 2009, 13 states have changed their vesting requirements, and 11 of those 13 made this period longer. The vesting period is amount of time a teacher must be employed before becoming eligible for pension benefits. If they meet the minimum vesting requirement, they’re eligible for a pension. If they don’t, they typically can get their own contributions back and some interest on those contributions, but they forfeit the contributions their employer made on their behalf.

The graph below shows the distribution of state vesting requirements. In 2012, 25 states required teachers to stay in the state pension plan for at least five years before vesting, and 15 required them to stay 10 years.

With today’s increasingly mobile workforce, five or 10 years is a relatively long time to stay in one job. Many teachers will never meet their vesting requirements and will be forced to forfeit their employer’s contributions and, in many states, they will also lose out on any interest that their investments would have accrued.

Let’s use Illinois as an example of how many teachers will meet the state vesting requirements. In 2010, faced with the one of the largest pension deficits in the country, Illinois created a new, less generous pension plan for new teachers that lengthened the vesting requirement from five years to ten. Education Next ran a report from Bob Costrell, Mike Podgursky, and Christian Weller that showed how the changes will affect teachers who stay their entire career teaching in Illinois (see Figure 2 here). However, we know that a large percentage of teachers won’t ever make it to five years in the profession, let alone 10.