I was out in Colorado last week for the launch event of the Colorado Pension Project, a new initiative raising awareness about teacher retirement insecurity in the state. Their website is worth exploring and their “member profiles” illustrate how current state pension plans disadvantage different types of teachers.
But after spending a lot of time immersed in Colorado’s pension system (and we’ll be doing more work on it in the future), one thing that becomes evident is just how crazy the current system is. Here are the basic facts:
1. Teachers contribute 8 percent of their salary.
2. School district employers contribute 17.45 percent of each teacher’s salary (and that figure is scheduled to rise to more than 20 percent in the coming years).
3. The state assumes a 7.5 investment return (and has actually earned 7.6 percent over the last 10 years).
If all you knew were these three variables, you could create a pretty awesome, cost-neutral retirement plan. Using the same contribution rates and investment returns, the table below shows how much a teacher who began at age 25 would have saved at various ages. It essentially calculates the value a teacher could accumulate if her and her employer’s contributions were placed into a 401(k) and invested with the Colorado Public Employees’ Retirement Association’s (PERA’s) current asset managers (there’s nothing preventing the state from offering this option to teachers).
Under a cost-equivalent 401(k) plan, a 25-year-old teacher could have retirement savings worth…
At age 35:
At age 50:
At age 60:
These hypothetical results are quite outstanding. The teacher would become a millionaire by age 54, and she could make her second million if she continued teaching until age 63.
Colorado’s actual pension plan provides a reasonably comfortable retirement for the small fraction of people who remain teaching in the state for an entire career, but it’s not nearly as generous as this hypothetical 401(k). This is true for teachers at every experience level. For example, a Colorado teacher with 10 years of service qualifies for only a minimal pension benefit, but an equivalent 401k consisting of her contributions, her employer’s contributions, and the interest earned on those contributions would be worth $100,000 more than her pension.
How is it possible that contributions plus interest are worth more than pension benefits? There are 14 billion reasons.
Instead of a straightforward retirement savings account based on contributions plus interest, Colorado has a complicated pension formula that relies on numerous assumptions about how fast investments will grow and how much teachers will earn in the future, how long they’ll remain as teachers, when and how long they’ll live in retirement, etc.
When those assumptions are wrong or the state doesn’t save enough for the future, it turns into a pension debt. That debt currently sits at $14 billion for schools. Colorado has responded by cutting benefits and increasing employee and employer contribution rates. (In 2010 it also went after the pensions of current retirees and reduced the amount they could adjust to inflation. After a protracted legal battle, the Colorado Supreme Court declared it legal this week.)
Colorado leaders hope this situation is temporary and they can eventually lower the employer contribution rate, but history is not on their side. If stock markets continue their strong recent trend, Colorado may be able to drop the employer contributions back down a bit. But in the past, temporary respites have always been followed by higher contribution rates in future years.
In the meantime, teachers are forced to forego their own retirement savings in order to pay down a debt accrued over many years. It harms their future retirement security and, by forcing districts into painful budget decisions, it harms the quality of education delivered to Colorado’s students. Teachers would be better off in a different system.