Blog: State Pension Plans

A recent study found that nearly two-thirds of California teachers will be pension "losers."
Education advocates have a lot on their plates. Common Core. School accountability systems. Teacher policy. Pre-k. Here's why they should consider adding teacher pension reform to their lists.

For some professions, it’s all about: “location, location, location.” For online start-ups, you probably want to be in Silicon Valley.  If you want to work on the stock market, head to New York City. But for teachers, where you work doesn’t matter, right?

Wrong.

According to WalletHub’s recent analysis, there is significant variation in teacher job quality from state-to-state.

But WalletHub’s rankings shouldn’t be taken at face value. And, as with any aggregate state ranking, the devil is in the details. About 14 percent of their total Job Opportunity & Completion Rank is based on the cost-adjusted “average” teacher pension in each state.

That’s a big problem. Averages can easily distort what’s actually going on.

Evaluating teacher retirement systems based on the average pension is misleading, because the majority of teachers do not even receive a pension. In Washington, D.C., for example, the average teacher pension is extremely high at almost $65,000, but only 29 percent of teachers ever qualify for a pension. So rating D.C.’s pension system on the average benefit of those who remain misrepresents the retirement realities teachers face. Simply put, a state’s average pension value does not provide much useful information about the quality of teachers’ retirement.

There are a couple of ways WalletHub could have evaluated state pension systems more effectively. For example, they could have used a vesting rate. This would grade states on the percentage of teachers that actually qualify for a pension. But even that won’t address other important concerns, such as whether teacher retirement benefits are portable or whether a state’s pension system is financially stable.

In WalletHub’s defense, teacher pensions are complicated. In fact, this points to a larger problem: teachers often lack sufficient information about their retirement. What is the vesting period? Do I qualify for Social Security? What is the retirement age?

The answers to these questions matter.

A new organization called the Retirement Security Initiaitve (RSI) is trying to help state and local governments improve their pension systems.
College students are being asked to pay higher tuition bills at least in part due to growing pension obligations.
Watch how Illinois' educator workforce has evolved over time, and how its Baby Boomers slowly age out of the workforce.
What is the average teacher pension? While this is an important piece of data, it doesn’t quite get at the whole picture.
Read about our latest research on inequities inherent in teacher pension plans, presented at the annual Association of Education Finance and Policy.

Illinois’ $111 billion unpaid pension debt--over half of which is due to teachers--has prompted talk over a federal bailout. Illinois policymakers continue debating fixes without any real long-term solutions, let alone a budget

But the $58 billion question remains: how well are Illinois teacher pensions actually serving its workers?

Unfortunately, not that well. Despite its high price tag, Illinois’ teacher retirement plan is doing a poor job of serving the majority of its teachers.

Last week, Chad Aldeman, Daniel Fuchs, and I released a report that examines the benefit structure for Illinois’ teachers. New teachers, in particular, face substantially lower retirement benefits than teachers hired before the recession. In 2011, in response to worsening financial conditions, the state legislature created a less generous plan for new teachers called “Tier II.” Tier II imposes on teachers a higher minimum service requirement (up from five to 10 years, making it more difficult for new teachers to qualify for a minimum benefit), a higher normal retirement age (meaning teachers have fewer retirement years to collect a pension), a less generous pension formula (calculating the final average salary from the last eight years of service instead of just four), and a lower, uncompounded cost-of-living adjustment (COLA).

The graph below compares Tier II benefits for new teachers to the prior Tier II plan. Notice how the red line dips negative for the first two and half decades of a new teacher’s service. This means that a 25-year old Illinois teacher hired after 2011 won't receive a net positive retirement benefit until she's worked at least 26 years. Until then, she’ll pay a penalty just to participate in the system.  

 

Pension plans failed to meet investment targets last year. What will that mean going forward?