Blog: State Pension Plans

Michigan’s retention rates are actually higher than they used to be. Fifteen years ago, even fewer Michigan teachers stayed in the classroom than they do today.
A new paper looks at pension changes adopted by states during the recent recession and finds that new teachers face significant penalties based solely on the day they were hired.
Few states have adopted pure defined contribution plans, but there has been a recent increase in the number of non-traditional retirement plans, including hybrid plans that give employees more flexibility while reducing state financial burdens.
In New York, teachers were subject to mandatory retirement laws that capped the age a teacher could work. Mandatory retirement laws do not exist anymore, but current pension systems do subtly encourage older teachers to retire.
With all the noise about teacher pensions it’s interesting that Social Security receives so little attention. About 40 percent of teachers are not covered. Why not?
As legislators in Illinois and other states face similar dilemmas about who pays the costs of pension payments, they should keep in mind issues of fairness, equity, and transparency.

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


The California Public Employees' Retirement System is twisting itself in knots trying to show how much value it adds to the state's economy.
The Urban Institute issued a report evaluating the impact of the hybrid plan for Rhode Island’s teachers. According to the study, 80 percent of teachers will benefit from the new system.
Unfortunately for teachers entering the classroom as a second career, most state pension plans are designed primarily to support the retirement of teachers with much longer time to serve -- leaving second-career teachers with relatively slim benefits.