Teacher Pensions Blog

Most people consider rising teacher retention rates a good thing. Teachers tend to improve rapidly in their first few years on the job, so increasing retention rates means students may likely be getting better teachers. Financially, it costs school districts money to recruit and train new teachers, so an increase in retention rates would let them save on those costs (although they have to pay more experienced teachers hirer salaries).

But one poorly understood aspect of rising retention rates is that they also lead to rising pension costs.

In order to be eligible for a pension, teachers must meet a minimum number of employment years or a “vesting” requirement before they receive rights to a pension. As discussed in Bellwether's recent paper, 24 states and the District of Columbia have a vesting requirement of five years and another 17 states require a teacher to stay 10 years before qualifying for a pension. Those vesting periods are rising; in 2009, during the economic recession, 12 states increased their vesting periods. The increase in vesting period saves states money by making it more difficult for teachers to earn a pension. Bellwether's research suggests that only a small percentage of teachers will make it to their state vesting requirement. Fewer teachers earning a pension means lower costs for the pension plan and less retirement security for those affected teachers.

Illinois was one of the states that increased its vesting requirements. Before 2011, teachers were required to work at least five years to be eligible for a minimum pension. In 2011 Illinois increased the vesting period as part of a pension reform law to reduce the state’s unfunded pension liability. The law (Public Act 96-0889) created two tiers of teachers. Teachers in Tier 1, those who were employed before January 1, 2011, continue to vest after five years of services. Tier 2 teachers are those who entered employment on or after January 1, 2011. They must serve 10 years before reaching eligibility for a pension. Citing the Commission on Government Forecasting and Accountability, a synopsis of the bill notes that the change in retirement age combined with a pension salary cap will save the state $43.86 billion. The actuarial assumptions anticipated increases in teachers staying, and lawmakers responded with tougher retirement policies. *

Using the Illinois retirement plan’s assumed rates, the following table shows the expected teacher retention rate in Illinois from 1997 to 2013. The data is based on the actuarial assumptions found in the Teachers’ Retirement System of the State of Illinois and TRS Comprehensive Annual Financial Reports. Although the data represent the plan’s assumptions for the future, not the actual rate, the assumptions are based on semi-regular experience studies that look at recent historical trends.

Illinois Teacher Retention, 1997 - 2013

Looking across the years, there is an increase in the expected retention rates from 1997 to 2012. From 1997 to 2001, the plan assumed only 39 percent of teachers would remain after five years. In 2002 to 2006, the plan readjusted its assumptions and expected 57 percent teachers to remain after five years. Based on experience study data indicating decreased withdrawal rates (or increased retention), the state teacher retirement plan further increased its 5-year retention expectations to 66 percent retention from 2007 to 2011. According to the experience study, the state actuaries underesitmated teacher retention and incorrectly “predicted too many terminations at younger ages.” In 2007, another experience study found that the state’s actuarial assumptions again predicted fewer terminations and recommend adjusting assumptions to reflect the increased retention rates. Today, the plan assumes approximately 67 percent teachers will remain for at least five years.

For Illinois, rising retention rates however translated to increasing costs, and in 2011, the state responded to these increasing costs by increasing the vesting requirement from five to 10 years. Using present-day assumption rates, this means that rather than 67 percent (the expected rate of teachers staying for five years) teachers vesting into the pension system, only 38 percent (the expected rate of teachers staying for 10 years) are expected to qualify for a pension. Raising the vesting requirement has more than compensated for the rise in teacher retention rates.

Illinois certainly has an onerous fiscal situation that needs to be addressed. The state’s situation is neither desirable nor sustainable. The Teachers’ Retirement System of Illinois reports an unfunded liability of $53.5 billion, and Illinois recently passed legislation in December 2013 seeking to address the funding shortfall. State legislators should continue to take steps to ensure fiscal stability and health, but in doing so, they should also consider structural reforms to address larger inequities.

*While teachers employed in Chicago participate in the Chicago Teachers’ Pension Fund rather than the Illinois Teachers Retirement System, they still follow the same Tier 1 and Tier 2 vesting requirements. Retirement ages and service years differ slightly within the Chicago Teachers’ Pension Fund.