Teacher pension systems can be quite complex. There are specific rules that vary state-to-state that affect any given teachers’ annual pension benefit after retirement. There are wider contexts to consider as well. For example, in some states teachers are not covered by Social Security, unlike most employees who can count on Social Security on top of their 401k or pension once they retire. Add all this together, and it can be challenging for teachers to have an accurate sense of how their annual pension benefit is calculated and, in the end, determine the value of their yearly retirement.
So how are teacher pensions calculated?
The first thing to know is that most states have a minimum number of years of service teachers must meet before they are even eligible for a pension, also known as a vesting period. As such, teachers must work a minimum number of years, often five or ten years, to actually qualify for a pension upon retirement. If teachers leave before meeting that threshold, when they retire, they’ll only receive the money they’ve personally put in and, in some cases, a bit of interest on that investment.
For those educators who work beyond the vesting requirement, traditional pensions are based on the teacher's years of experience and a measure of "final average salary," usually the average of the teacher's salary in the last three or five years prior to retirement. In general, the longer a teacher has worked and the higher her salary, the higher her pension will be. There is one more factor: a state-set benefit "multiplier," typically around 2 percent, that literally multiplies all of these variables together to determine how much a teacher will receive yearly during retirement.
The example below is a typical state pension structure and illustrates how teacher retirement benefits are typically calculated:
That's not all. States also set a minimum retirement age, before which teachers can’t access their pension benefits, and years of service requirements that teachers must meet to receive full benefits. For example, some states employ the "Rule of 80," which sets the retirement age as the point when the sum of an educator’s age and years of service add up to at least 80. States also set early retirement ages, at which point workers can collect reduced benefits. How much early retirement affects benefits varies by state.
Researchers have found that traditional teacher pension benefits are back-loaded in that most of their value comes as the teacher nears the normal retirement age. That happens because pension plans use the "final average salary" in the years they were earned; they do not adjust for inflation, and someone who leaves the profession years before collecting a benefit will see their pension gradually wear away to inflation. As a result, teacher pension plans typically provide generous retirement benefits only to those who teach for multiple decades. On the other hand, those with shorter careers receive scant, and in some cases, no pension benefit.
Here are a few other things teachers should consider when thinking about their retirement:
- What is the state’s vesting period? In other words, how long do you need to work before you will qualify for a pension?
- How much are you contributing per month to your pension? How much does the state contribute on your behalf on top of that?
- Are you enrolled in Social Security, or are you solely dependent on your pension and your own personal savings?
- If you’re a new teacher, does your state offer alternative retirement plans that might be more portable than the traditional pension plan?
Generally speaking, due to how pension systems are designed, only about half of teachers ever earn a pension. Instead, they only receive their own contributions made to the pension fund. Among those who do earn a pension, only those teachers who spend most of their careers working in the same state are the true "pension winners." Current and prospective teachers, particularly those living in states with other retirement options, should think carefully about which retirement saving strategy works best for them.