The Census Bureau’s Annual Survey of School System Finances compiles total education spending and revenue across the entire country. The latest data, released earlier this week, shows teacher benefits continue to eat away at school budgets.
In total, public school expenditures have tripled since 1992 (including inflation). The table below shows how those dollars are being spent across broad categories. Figures for all years reflect current expenditures and do not include capital costs or debt.
As the table shows, school districts are spending more and more of their budgets on employee benefits, at the expense of base salaries and wages. Over the long term, the percentage of education budgets going toward salaries fell from 65.0 percent in the 1991-92 school year to 55.7 percent in 2017-18. Over the same time period, the percentage of school district budgets going toward employee benefits increased from 15.0 to 24.3 percent.
As a share of total expenditures, benefits now eat up nine percentage points more than they did in 1992.
These are steady, long-term trends, but they're no less troubling. Increased spending on benefits is one reason teacher salaries have been flat, in real terms, over the last few decades. Benefits are also a less efficient use of money than salaries, since teachers value $1 in take-home pay more than they do $1 in benefit spending. Worse, much of these rising benefit costs reflect the growing burden of debt costs, not actual benefit enhancements for teachers and retirees.
Updated on May 18, 2020Taxonomy:
A Massachusetts teacher emails us with a question about her options for an early retirement:
I am a teacher in Massachusetts. With my last child going to college next year, we have kicked around the idea of moving out of state. This would be after my 15th year of teaching and I will be 51 years old. I see that I am vested after 10 years so my question is:
Could I retire after next school year (my 15th year at age 51) but defer my payment until I am 55 or 60? This would give me 15 years at 55 which I believe would be a reduced pension, or 15 years at 60, which would be a full pension.
I wanted to see if these plans were an option that would be available to me after my 15th year of teaching.
Any information you could provide would be greatly appreciated.
Hi Massachusetts Teacher,
The short answer is yes, you could certainly take either of those options. As long as you don't withdraw your contributions from the Massachusetts Teachers' Retirement Systems, you'd be eligible to begin collecting a pension at either the early or normal retirement ages. Those ages depend on when you started teaching in Massachusetts, see here to determine which tier you are in.
Massashusetts provides a retirement "percentage chart" to help you make your decision. With 15 years of service, if you begin collecting your pension at age 55, you'd be eligible for 22.5 percent of your final average salary. If you wait to collect until age 60, you'd be eligible for a pension equivalent to 30 percent of your final salary.
There are two things to be aware of. One is that your pension will eventually be based on your salary in the last years in which you were employed. That is, your pension amount will essentially be frozen from now until you begin collecting; it won't increase due to inflation.
The second thing is that starting over in a new state would mean significantly less in terms of pension wealth than sticking it out in Massachusetts. Two smaller pensions are usually worth much less than one larger one. This article gives a good explanation of how that works, with a Massachusetts example.
I hope you don't let those cautions discourage you from pursuing your plans to spend time with your family, but hopefully they're helpful as you weigh your options. Best,
Note: This is a real question submitted to us. We have removed all personally identifiable information, but we believe there's a value in sharing frequently asked questions to benefit others with similar concerns. If you have a question you would like answers to, please feel free to email us at email@example.com. Please note that by submitting a question to us, you agree to let us share the question and our answer publicly here on the TeacherPensions.org blog.
At the same time as states face budget shortfalls in the wake of the COVID-19 pandemic, public pension plans also lost an estimated $400 billion in assets in the first three months of 2020. In response, as part of a larger request for a COVID-19 relief package the Illinois Senate President called for $10 billion in federal funding to help plug Illinois' state and municipal pension funding gaps.
Historically, Congress has enacted rules and regulations to govern private-sector retirement plans, but it has mostly shied away from extending those rules to the public sector. Should that change? Are state and local pension plans in such a dire situation that they need the federal government's support? And if so, what should Congress ask for in return? We reached out a range of voices to weigh in on these questions. Here are their responses:
Andrew Biggs, resident scholar at the American Enterprise Institute
Public sector pensions have long argued that they need not abide by the stricter federal funding rules applied to private sector pensions. Private pensions must assume conservative rates of return on investments and must address unfunded liabilities promptly. Under those rules, the average single-employer private pension today is about 86% funded, assuming a 3.4% “discount rate” applied to plan liabilities. Measured using that same discount rate, the average state and local government pension would be around 38% funded. Simply put, for each dollar of promised future benefits, private sector pensions have set aside nearly twice as much money as state and local plans.
State and local governments have long fought stricter pension funding rules. They assumed average investment returns of 7.3% in 2019 and amortized unfunded liabilities over decades rather than years. They claimed that governments have special powers that make the more-prudent federal regulations unnecessary. These arguments were wrong before and today, with pensions worse-funded than following the Great Recess and Illinois requesting $10 billion in federal aid to stay afloat, they are more clearly mistaken.
Federal law already regulates state government workplaces via minimum wage laws, the Affordable Care Act and other means. There is today compelling evidence that underfunded state and local government pensions should be similarly-regulated. But federal regulation of state and local pensions, by covering them under the Employee Retirement Income Security Act of 1974 (ERISA), could be made voluntary and come with certain benefits.
Congress could allow state and local pensions to become ERISA-regulated in exchange for providing them with financial aid, such as to cover pension contributions over the next several years. Pension participants would also become employees eligible for Pension Benefit Guaranty Corporation benefit insurance should their plan become insolvent in the future. In return, the state or local government would need a credible plan to significantly increase future funding of their pension and address unfunded liabilities promptly, while also paying PBGC insurance premiums. Congress might also include a provision requiring that governments seeking federal pensions assistance enroll their employees in Social Security, if not already covered.
But ERISA regulation provides another option: if a state cannot or does not wish to fund a traditional pension to ERISA standards, it can instead freeze its pension and shift employees to a defined contribution, 401(k)-style plan. Because federal law pre-empts state law, ERISA coverage would free states like Illinois from legal prohibitions on changing future benefit accruals or altering the plan’s structure.
The issue is simple: Federal pension regulations exist for a good reason and those reasons apply to governments as much as to private companies. Those regulations offer employers a choice: either run a traditional pension prudently, using conservative assumptions and prompt addressing of unfunded liabilities, or don’t run one at all.
Chantel Boyens, principal policy associate in the Income and Benefits Policy Center at the Urban Institute
One important role of the federal government in supporting state and local governments as they address ballooning debt is to ensure that any steps taken to address financial shortfalls do not undermine the retirement security of workers broadly, and especially the adequacy of benefits for lower-wage workers. This includes preventing state and local governments from reducing pensions below Social Security levels for workers not covered by the program. Pension plans should not be allowed to continue reducing future benefits for workers not covered by Social Security through loopholes and gaps in the existing regulations.
Like other state and local pension plans, plans offered to workers not covered by Social Security have reduced promised benefits for new hires substantially since the Great Recession. But because these plans are offered to workers not covered by Social Security, they are required by law to provide participants with benefits that are at least equivalent to those provided by Social Security. However, recent analyses by Chad Aldeman and Laura Quinby show that the safe harbor test used to determine whether state and local pension plans meet this threshold is not adequate.
As state and local pension plans consider steps to address funding shortfalls, the federal government has a responsibility to ensure that the retirement safety net provided by Social Security protects all workers. For workers outside of Social Security, that means strengthening the safe harbor rule that governs their non-covered pension plans. For example, the rule should consider protections for workers who change jobs and may move in and out of Social Security coverage. Most plans use backloaded benefit formulas and vesting requirements that favor long-tenured workers.
The risks posed to workers by shortfalls in state and local pension plans also underscores the case for moving to a truly universal Social Security program. Covering all workers would impose transition costs on states. The federal government could consider options to help states manage these transition costs over time or even subsidize a portion of the cost to protect the adequacy of benefits for all workers.
Keith Brainard, research director, on behalf of the National Association of State Retirement Administrators
A careful review of the operations and funding of public pensions, their share of overall state and local budgets, and the steps state and local governments are taking to bring their pension plans into long-term solvency, reveals that on the whole, state and local pensions are weathering the COVID-19 crisis. Public retirement system administrative operations have successfully been moved remotely; payments to retirees continue to be made on time and in full; trillions of dollars in public pension fund assets continued to be managed and invested in the financial markets; and measured changes can be expected to continue to be made to ensure public pensions’ long-term sustainability. Suggestions for federal intervention into public pension plans continue to be resoundingly rebuked.
NASRA opposes efforts to both impose new federal regulations on state retirement systems, and to restrict states’ ability to design plans and manage investments. NASRA testimony before a U.S. Congressional Committee in 2011, remains relevant today. Over the last generation, most public pension plans have moved from financing on a pay-as-you-go basis, to funding based on actuarial methods. State and local pensions’ long-term financing strategy, which takes place over decades, should not be mistakenly juxtaposed against current annual revenues and expenditures of state and local governments. Given the differing plan designs and financial pictures across the country, one-size-fits-all federal intervention is unhelpful.
As national organizations representing state and local governments and elected officials have jointly stated, “Federal regulation is neither needed nor warranted, and public retirement systems do not seek federal financial assistance. State and local governments have and continue to take steps to strengthen their pension reserves and operate under a long-term time horizon.”
First and foremost, any federal action on state and municipal pensions must include an expansion of ERISA – the law that requires private sector pension systems to properly fund their obligations on an annual basis. Those underfunded systems that can’t meet the ERISA terms and needing a bailout would then be subject to the following requirements:
1. Close under-funded pension plans to new salary dollars. Pension systems deep in a hole must first stop digging, in this case by closing the pension fund to new salary obligations. Pensions on existing salary dollars would be protected and continue to earn years of service. Employers could award new raises, but the increments of the raise would be non-pensionable (although could be eligible for other compliant retirement plans). Often it is local employers who award late-career raises (which drive up pension obligations) but states who then must pay the pensions. Edunomics Lab analysis shows that California’s CALSTRS plan would have over $16B less in obligations if such a requirement had been imposed 10 years ago (even after accounting for what would be lower employee contributions).
2. Pay for any bailout with a federal tax on pension payments from systems needing rescue funds. In places like Illinois, leaders pledged to unsustainable pensions, ignored their debts, and paid more in salaries (further driving up pension debt). Leaders in other locales, like neighboring Wisconsin, followed a path of fiscal prudence and paid its debts, even when doing so has meant teachers earn $10K less per year. So, who should own Illinois’ pension tab?
Illinois’ TRS fund needs a bailout, and while Illinois leaders haven’t been able to legally modify the generous pensions it promised, the federal government can tax those payments. The tax could take the form of a flat or progressive rate, collected by the pension fund via a monthly withdrawal from pension checks. Where a retired teacher earns $130,000 per year from the Illinois TRS (and yes, plenty do), the payments could be taxed before they ever reach the retiree. Such a tax would only last as long as the fund needed bailing.
This plan gives states the tools they need to get back on track financially without passing the debt burden to younger generations who neither benefitted from the spending nor had no say in the decisions that got us here.
In a recent op-ed for The Sacramento Bee, Ted Toppin, the chairman of Californians for Retirement Security, argues that traditional pension plans help “flatten the curve” and are “built to withstand the extremes of economic cycles.”
Unfortunately for Californians, the required contribution rates into two the state pension plans covering teachers, firefighters, and police officers—CalSTRS and CalPERS—have been rising for two decades, and will have to rise again in the wake of the coronavirus.
What will the current market downturn mean for those plans? It’s still too early to know for sure, but in a new piece for The 74, I look back at what happened to CalSTRS in the last recession:
Between declining assets and rising liabilities, CalSTRS went from being 89 percent funded in 2007 to 67 percent funded in 2012. Its unfunded liabilities — the gap between what it had saved and what it owed to current and future retirees — grew from $19 billion to $71 billion.
Rather than seizing the opportunity to consider alternative models, California legislators hunkered down with a number of small changes. Like most states, California made its pension benefits worse by creating a new, less generous tier of pension benefits that applied only to new hires. For those workers only, California raised the retirement age by two years.
The state also increased contribution rates required of teachers themselves, as well as state and district budgets. In legislation passed in 2014, the state scheduled CalSTRS contribution rates to slowly ramp up from a total of 18.3 percent in 2014 to 35.3 percent in 2020-21.
CalPERS has pursued similar changes, but neither plan is prepared for the coming recession. Across both plans, the state had an unfunded liability totaling $246 billion as of last April. That figure is surely much higher today. Just like in the last recession, costs are likely to trickle down to workers and taxpayers through higher contribution rates—not to mention less money available for all other public services.
In short, the California pension plans have not yet flattened their curves. Workers and taxpayers will suffer the consequences.
Across the United States, growing unfunded pension liabilities have quietly slashed state education budgets, leaving fewer dollars for teacher salaries, classroom resources and other education priorities. A new report from Equable Institute has found the share of state education spending going to pension costs has nearly doubled from 7.5% in 2001 to 14.4% in 2018. The report is the first of its kind to quantify the effects of growing unfunded liabilities on the education system in detail.
Hidden Education Funding Cuts provides a state by state analysis of state education funding trends over the past two decades, and then adjusts that spending for inflation and pension costs to show what the ultimate effect has been of growing unfunded pension liabilities on K–12 resources.
Want to find out more about the hidden education cuts in your state? State specific reports and the national summary paper can be downloaded at Equable.org/hiddenfundingcuts.
What are “hidden education funding cuts”?
Since 2001, teacher pension plans have collectively fallen hundreds of billions of dollars behind in the savings levels necessary to pay all future promised benefits. Meanwhile, state K–12 education spending levels have generally been stagnant. Many states simply have not ensured education funding levels are keeping up with the increased costs created by pension funding shortfalls.
In an era when school districts nationwide are struggling financially, growing pension costs are exacerbating already-existing fiscal stress. The result is that less education money is available today for teacher salaries and classroom spending than there would be if teacher pension funds had been better managed over the past two decades. And that’s the hidden cut to education funding.
Where the national trend has seen hidden cuts nearly double from 7.5% to 14.4% of state K–12 funding going to teacher pension costs, the state to state results have varied. In Pennsylvania, exploding teacher pension debt has caused the rate of hidden cuts to surge from 2% to 34% between 2001 and 2018. The absolute hidden cut level has reached a similar 34% in 2018 for Illinois, up from 12%.
The effects of these cuts are felt particularly hard in high-need districts which have fewer local resources to draw on to fill in the gaps when education costs rise, creating less funding for teacher salaries and programs aimed at improving academic and other outcomes.
How did this happen?
Visit Equable’s interactive report website to dig into the details on how education budgets have stagnated while teacher pension costs soared since 2001.
To see how individual states stack up against each other in terms of how much their hidden education funding cuts have changed over the past two decades, see the chart below.
Anthony Randazzo is executive director at Equable Institute, a bipartisan non-profit working to create a safe, more secure retirement for public workers everywhere.
The economic collapse in the wake of COVID-19 will hurt investment returns, whether those investments are held by individuals in their 401(k) accounts or in public-sector pension plans.
As states grapple with the consequences of a $1 trillion growth in unfunded liabilities, we’re likely to see calls for states to close their defined benefit pension plans and replace them with defined contribution accounts, like 401ks. Pension advocates may respond that the current environment shows exactly why not to take such a move, since the economic collapse presents a stark illustration of what might happen if we shifted all investment risks from state and local governments onto individuals.
But as I write in a new piece for The Omaha World-Herald, there’s another alternative that states should consider. This option, called a “cash balance” plan, should be particularly appealing to teachers. Cash balance plans balance the risks between employees and employers, provide a more portable benefit than traditional pension plans, and help prevent the build-up of unfunded liabilities.
To illustrate this issue, consider the contrast between the retirement benefits Nebraska provides its school employees and its state employees. Teachers and other educators are enrolled in a traditional defined benefit pension system, while state employees hired since 2003 are enrolled in a cash balance plan.
Under Nebraska’s School Employees’ Retirement System, the state has built up an unfunded liability of $1.3 billion. In response, the state has raised contribution rates and introduced new, less generous benefit tiers for workers based on their hire date. Employees must serve for at least five years before qualifying for a pension (called the vesting period). Those hired post-2018 are placed in Tier Four. They must contribute 9.78 percent of their salary and are eligible to retire at age 65 or as early as age 60 if the sum of their age and years of service is more than 85 (called the “rule of 85.”). At that point, they qualify for a pension worth 2 percent times their years of service times the average of their five highest years of salary.
Due to very high early-career turnover rates, only about one-third of new Nebraska educators will qualify for any pension at all, and only about one-in-eight will leave with a pension benefit worth more than their own contributions plus interest.
In contrast, since 2003 Nebraska has enrolled all new state employees in a different type of retirement plan. Commonly known as a cash balance plan, it is legally a defined benefit plan. But rather than conferring benefits via a formula, it guarantees employees a minimum rate of return on their investments. In Nebraska, that figure is 5 percent a year, plus additional interest credits and dividends when investment returns are strong. Employees contribute 4.8 percent of salary, and after vesting at three years, employees receive a state matching contribution equal to 7.49 percent of their salary. Upon reaching retirement age, cash balance plan members can collect a monthly annuity (just like a pension plan) or take their money as a lump-sum.
The table below compares the two plans as of today. Compared to state employees, school employees have to wait longer to collect a retirement benefit (five years versus three), pay higher contribution rates (9.78 versus 4.8 percent), and receive less in employer-provided benefits (3.57 percent of salary versus 7.49 percent). Moreover, employers under the school plan are paying an additional 8.31 percent of each member’s salary to pay down the plan’s unfunded liabilities. That money could be going toward salaries or other school services but is instead being siphoned off to pay for the plan’s pension debts.
The teacher plan already has more than $1 billion in unfunded liabilities. If the past recession is any guide, it will likely need to raise contribution rates again and/ or make further benefit cuts.
In contrast, Nebraska's cash balance plan is currently operating a surplus and has mainted a funding ratio of 90 percent or more every year since it began. In the midst of the current economic downturn, the cash balance plan will continue crediting employees with the same 5 percent investment return guarantee. While those of us with 401k plans will watch our investments decline, and teachers will feel the effects of a downturn via their pension benefits, Nebraska state employees can rest easy knowing their investments will continue to grow at the same 5 percent rate.