Earlier this month I was invited to speak about teacher pensions at a meeting of the Taxpayers Association of Central Iowa. Although the costs of Iowa’s pension system (IPERS) are rising, my presentation focused on the benefits side of the equation: Is Iowa’s pension plan good for the state’s teachers? Are there other alternatives that could provide better benefits?
My full slide deck attempting to answer those question is at the bottom of this post. I centered my presentation on three basic myths about pensions:
- The myth that traditional pension plans take all the risk on behalf of teachers;
- The myth that traditional pension plans help retain teachers; and
- The myth that traditional pension plans offer better benefits than alternative models.
Like any good myth, each of these has some kernels of truths behind them, but they obscure a larger story.
First, it’s true that pension plans do take a number of risks on behalf of workers. In Iowa, as in most other states, teachers don’t have to decide whether to save for retirement, how much to contribute, or how to invest their savings. The state takes care of those decisions for them. The state also takes care of decisions about how to draw down retirement assets. Rather than having access to one lump sum, the state pension plan issues qualifying retirees monthly checks throughout their retirement years.
But those advantages still leave some risks on the table for Iowa teachers. Pension formulas are complicated, and teachers often make bad decisions about whether they should take a pension or withdraw their contributions. Traditional pension plans can also take on debt when their promises exceed their savings, and those costs trickle down to teachers in real ways.
Worse, pension plans tend to be heavily back-loaded, meaning they only deliver decent retirement benefits to teachers who stay for 20 or 30 years. For a variety of personal and professional reasons, most teachers don’t stay that long. When a teacher starts her career, she faces the risk that she will need to move states and start over, or that she may just not like teaching as much as she thought she would. Pension plans leave most teachers exposed to this “attrition risk," the risk that they’ll leave before qualifying for decent retirement benefits.
Second, there’s a myth that pensions help retain teachers in the profession. If that were true, we should see teachers changing their behavior in order to qualify for a pension in the first place. But we don’t. Iowa, for example, requires teachers to stay for 7 years in order to qualify for a pension. If Iowa teachers truly valued their pensions, we should see some fraction of 6-year veterans alter their behavior to reach the 7-year mark. But that doesn’t show up at all, even in the state’s official actuarial assumptions. Pensions do seem to help retain later-career teachers, although the existing evidence suggests that effect is limited to teachers who are very close to reaching their retirement age.
In contrast, pension plans clearly have a push-out effect on later-career teachers. In Iowa, teachers start leaving in large numbers starting at the state’s early retirement age of 55 and accelerating at age 57. Even among Iowa teachers who make it to age 55, the state assumes only about 3 percent will make it all the way to age 65 (the normal retirement age for Social Security). When researchers have tried to weigh the balance between retention and push-out incentives in traditional pension plans, they’ve found that the push-out effect is much stronger. The truth is that states are using their pension plans to push out veteran teachers from the classroom, which has a negative effect on student learning.
The third myth is that the existing system is the best way to deliver benefits for teachers. In fact, there are multiple ways states could structure benefits that would leave all teachers better off.
In Iowa, I looked at three different alternatives—a cost-neutral cash balance plan, a cost-neutral defined contribution plan, and a defined contribution plan offered to Iowa state university employees. The cash balance would guarantee all teachers a pre-determined rate of return—5 percent in this example—and provide a steady accrual of retirement benefits rather than the current back-loaded system. I also modeled two different defined contribution plans, one using Iowa’s current teacher pension contribution rates, and the other using the same contribution rates as Iowa offers to its state university employees. Ironically, Iowa is paying about the same amount for each of these last two plans (contributing a total of 15 percent of salary), but the difference is that the teacher plan has debts, while the state university plan does not.
Most teachers would be better off in one of these alternative plans. Depending on the plan, between 73 to 78 percent of teachers would have more retirement savings under the alternative model. In addition, because none of these alternatives would accumulate further debts, all teachers would see higher take-home pay.
My main lesson for Iowa policymakers is that retirement plans should be for workers, not the state. Iowa’s main goal should be providing a path to a secure retirement to all of its teachers, no matter how long they choose to stay. Iowa’s current pension system isn’t accomplishing that goal, but there are readily available alternative plans that could.
To learn more about Iowa’s teacher pension system, click through my slides below: