The recent firing of FBI Deputy Director Andrew McCabe prompted a political firestorm. In addition to the posturing and prognosticating, many observers were outraged that he was fired just hours before he could retire with full pension benefits. The concept of suddenly losing your retirement savings is understandably alarming to most Americans. If nothing else, the McCabe example is a good reminder that at-will employment and back-end “guaranteed” benefit systems are not always a sure thing. For that reason, the McCabe story draws many parallels to the problems with current teacher retirement benefits.
Let’s first discuss the real consequences of McCabe’s firing on his pension. Then, tackle how the worry over his financial future is more aptly applied to teachers and their pension benefits.
McCabe was fired right before his 50th birthday. The timing is significant because under the Federal Employees Retirement System (FERS), law enforcement officials qualify for early retirement with full-benefits at age 50 if they have at least 20 years of service. Other federal employees who do not work in law enforcement, say at the U.S. Department of Education, aren’t eligible for this deal.
So, McCabe’s pension hasn’t been emptied out. But that isn’t to say it hasn’t been negatively affected. McCabe won’t qualify for full benefits for another 7 years, his multiplier will get bumped down, and he lost post-employment health coverage. In the end, this adds up to a considerable financial loss. According to an analysis from the Urban Institute, McCabe lost over $1 million in total pension wealth, amounting to around three-quarters of its total value.
Some have argued that it’s not worth shedding tears over McCabe’s predicament (at least in terms of his retirement), since federal pensions are generous. I’m not particularly interested in litigating how much financial loss is worthy of sympathy. However, it is fair to say that in the end McCabe still will receive a pension. And in the meantime, he likely will be able to find gainful employment elsewhere, retire again, and collect Social Security.
In some ways, McCabe is more fortunate than most teachers.
Unlike federal employees like McCabe, who qualify for retirement benefits after five years, some states require teachers to stay much longer. 20 states require teachers to stay 7 or more years, and 15 states impose a 10-year waiting period. By our estimates, about half of new teachers never qualify for a pension at all.
Teachers face other barriers to a healthy retirement. Unlike the federal government, which employs workers all over the country (and even the world), state pensions are limited to state boundaries and are not portable. As a result, a teacher who moves to a new state has to participate in two pension systems. This can dramatically decrease her pension wealth in retirement.
Additionally, since the mid-1980s all new federal workers have been enrolled in Social Security. But Social Security participation is still optional for states, and around 1.2 million teachers are not able to participate. That makes them even more at risk from poorly structured state pension plans.
And finally, McCabe has more retirement plan options than the typical teacher. In addition to participating in Social Security, he is enrolled in the low-cost defined contribution (think 401k) federal retirement program, Thrift Savings Plan (TSP). All the while he also is in the federal pension system. Teachers typically do not have as many options for their retirement.
Although McCabe’s pension is in the news and receiving the public’s attention, it is teachers who regularly experience retirement insecurity. The problem is that state pension systems – as they are currently constructed – do not meet the retirement needs of today’s educator workforce. It is possible to avoid large peaks and valleys and structure benefits in ways that are more suited to recruiting and retaining high-quality workers of all ages.
At this point we don’t know much about whether McCabe deserved to be fired or not. We do know, however, that his pension paid a hefty price. Hopefully the public attention on this issue will broaden into a wider discussion about how best to ensure public employees’ retirement needs are met.