Public pensions are not portable. A teacher with five years of experience in one state cannot freely transfer her service time if she moves to another state. Instead, she starts over. According to economists Robert Costrell and Michael Podgursky, mobile teachers face significant losses when moving between pension systems. A teacher who teaches for 30 years in one state system will have a significantly larger pension than a teacher who splits the same amount of service over two states. Pension systems reward employees who stay for a full career.
States have attempted to ameliorate the non-portability of pensions by “selling” service credit. Teachers who taught in one retirement system can “buy” back credit for the service they performed in another state, rather than relinquishing the time. For a hypothetical example, consider a teacher who taught for five years in Maryland and then moves to Virginia. In Virginia, she has zero service credits and must start over to reach a full-career pension. But if she buys service credit from the state, she can add more years towards her Virginia pension. Presumably buying back service years can help a teacher get a full-career pension sooner.
Unfortunately, though, pension plans exact transaction costs on mobile teachers that significantly hamper their savings. First, states limit the number of buyback years, often to five or ten years. The Virginia hybrid plan limits buyback credit to two years. The hypothetical ex-Marylander couldn’t purchase enough service credits to match her actual years of experience even if she could afford to do so.
Second, states charge prices that far exceed what teachers typically receive when cashing out of a state pension system. When a non-vested teacher leaves a system, she has the option of withdrawing her pension contributions. In 43 states, however, a teacher who leaves can only take back her own contributions and some interest; she loses the contributions her employer made on her behalf, which are often 10 or 15 percent of her total compensation.
Then, if she tries to take her reduced withdrawals and purchase service credits in her new state, she won’t have enough to cover the same number of years. That’s because states often charge the full actuarial cost to purchase service years. This means to buy a service year, teachers essentially need to pay the costs of contributions and interest had they worked in that state. In states such as Arkansas, Missouri, and Florida, a teacher must pay both the employee and employer contributions for the year she wants to purchase. In Virginia, a teacher is charged a multiplier of her current annual salary for service credit; the ex-Maryland teacher can only buy back two years of service for a total price tag of $10,552.34. However, this amount is almost double the required employee contributions a current Virginia teacher would pay over the course of a couple years. In the current Virginia hybrid plan, a teacher is required to make an employee contribution of 4 percent towards the defined benefit component of the plan, and a minimum 1 percent towards the defined contribution component of the plan. Over the course of two years, a teacher contributes a total of roughly $5,000. Like many states, Virginia sets service credit at a price tag that includes much more than just employee contributions.
Put together, this means that a non-vested teacher wishing to buy a year of service credit is expected to foot the entire bill (employee contributions, interest, plus employer contributions or a multiplier in certain states) while only having her own contributions from the previous state in her pocket.*
Lack of portability is a major roadblock for teachers. According to recent research, teachers have become increasingly more mobile over the past two decades. While Virginia and other states offer licensure reciprocity to out-of-state teachers, there’s no such thing yet as a reciprocal agreement for pensions. Instead, teachers must split their pensions across states, significantly decreasing their benefits, or make a costly purchase of service credit.
* There are high transition costs even for a teacher who vests into a state system and then moves. According to Costrell and Podgursky, a teacher who teaches for 15 years in California could purchase at most 3.7 years of service credits in Florida using all her withdrawal contributions from her time teaching in California.