Money spent on public teacher pensions is often left out of analyses of school finance equity. Rather than a being seen as an issue affecting students’ education, pensions are often viewed as a budgetary dilemma for state legislators. Yet, both of these approaches overlook the effect pension spending can have on increasing the funding gap between schools based on students’ race.
Last week I released a new report, “Illinois’ Teacher Pension Plans Deepen School Funding Inequities,” that shows just how much pension spending in Illinois affects the state's finance equity. The results are startling and reveal that teacher pensions are yet another example of how states and districts underinvest in the education of low-income students, and the educations of black and Hispanic students.
Here are three key reasons why teacher pensions should be thought of as a key part of the push to ensure educational equity:
- Class-based gaps grow by more than 200 percent after accounting for pension spending. Teacher salaries comprise the lion’s share (roughly 80 percent) of school expenditures. And, unfortunately, the most experienced and highest paid teachers are unevenly distributed across schools. In Illinois the salary gap between the schools serving the highest and lowest concentrations of low-income students is on average around $550 per pupil. After factoring in pensions, however, the disparity jumps to over $1,200 per student.
- Race-based gaps increase by more than 250 percent after accounting for pension spending. In Illinois, the average teacher salary-based gap is $375 between schools serving predominantly white students and those serving predominantly nonwhite students. But after accounting for money spent on teacher pensions, the inequity increases to nearly $950 per pupil.
- States are investing more money in their pensions (because they’re in significant debt), and that will widen the gaps even further. From an educational equity point of view, the Illinois pension system is the problem. Since pensions are paid as a percentage of teachers’ salaries, which are unevenly distributed across the state, funneling more money into the system may help to decrease unfunded liabilities, but it also will result in even larger funding disparities.
Illinois is widely considered to operate one of, if not the most, inequitable school finance system in the country. Yet, many prior analyses underestimated the problem because they have not always included money spent on teacher pensions. This problem is not unique to Illinois. On the contrary, pensions will increase funding disparities in any state with an uneven distribution of teachers. The effect will likely be greater and more closely resemble Illinois in states, such as Missouri and New York, where large urban cities operate separate pension funds.
There are a couple of steps states can take to mitigate the increase in education funding disparities due to pension spending. Those states with more than one retirement system should consider folding the district plans into the state fund. The state has greater resources and almost always contributes to the pension fund at a higher rate. This would ensure that schools in the district — which disproportionately serve low-income students and students of color — receive pension payments at the same rate as other schools.
As it stands now, low-income students and students of color receive far less than their fair share in school funding. To change that, states must address the structure of their teacher pension systems as well as their school funding formulas. Teacher pensions are a key feature in the broader education equity debate.
Pensions are for survivors.
That's the first thing that struck me when reading the National Public Pension Coalition (NPPC) short report, “Why Pensions Matter: The history of defined benefit pension plans in the United States of America.” It starts out like this:
Pensions, in the broadest sense of the term, have existed since ancient Rome. Soldiers in the Roman army could earn pensions through their military service. The value of these pensions to Roman soldiers helped to maintain the power of emperors such as Augustus. Pensions for military service have continued to exist in one form or another in the two thousand years since.
This is true as far as the history goes, but it’s a telling anecdote, because it's a reminder that pensions benefit survivors. In the past, that meant surviving war. Today, that means remaining in one profession and one state for an entire career. State pension plans assume that less than one-in-five teachers will survive long enough to truly benefit from today’s back-loaded teacher pension plans.
The report is a few months old now, and it has some useful historical notes, but it also includes a number of attempts to gloss over the true history of retirement savings in this country. To show where the NPPC's history bleeds into a false nostalgia, I’ve pulled out a few sections below and annotated where the report goes wrong:
During the postwar economic boom, defined benefit pensions represented the closing chapter of a solid middle class life. The American dream was a steady job with a middle class salary, decent benefits, and the promise of a pension in retirement. For many, but not all, Americans this dream was a reality. A worker with a high school education could get a job on the line at a steel factory and live that middle class lifestyle. Other workers found job security and a good salary through serving their community as a teacher or firefighter or librarian. For a period of time, pensions were accepted as a key element of middle class life in the United States. This started to change in the 1980s.
The words "promise," “dream,” and “could” are doing a lot of work here. As I’ve written before, it’s a myth that there was ever some sort of “golden era” where all workers had access to a secure retirement. In the early 1980s, only 43 percent of new retirees had any retirement benefits other than Social Security. That was before pensions began to decline and the 401k began its steady ascent, and yet most Americans still did not have any retirement benefits.
Moreover, retirement income was highly contingent on income. During the peak era for defined benefit pension plans, only 22 percent of retirees in the bottom quartile had any retirement income other than Social Security, compared to 64 percent among those in the highest quartile.
In other words, while it was theoretically possible for anyone to graduate high school and earn a factory job with a pension, there just weren’t that many people who were able to take advantage of that dream. There are lots of reasons for this—there weren’t that many factory jobs to go around, those pensions required long vesting periods of 10 or 20 years, and lower-income workers have higher turnover rates—but suffice it to say that the NPPC’s history is overly rosy on this front.
They go on:
Critics of public pensions often complain that these pension plans have long vesting periods and reward the longest serving employees. That is intentional. In public education, for example, most research points to teachers dramatically increasing their effectiveness during their first few years of teaching and then maintaining that effectiveness throughout their career. They do not lose their effectiveness the longer they continue in their profession. They are more likely to continue teaching at their peak effectiveness rather than decline. Structuring retirement plans to reward teachers that only teach for three or four years does not make sense because that would reward teachers who leave before reaching their peak effectiveness, often to be replaced by someone without any experience. Similarly, with firefighting and policing, there are a lot of sunk costs that go into training new recruits. It is not in the interest of these departments for their new employees to leave right after training, so their pension plans are structured to promote long-term commitment to the profession.
It’s noteworthy to see a union-backed coalition like the NPPC make their priorities this explicit. They’re essentially admitting that they only care about retirement security for those “committed” to the profession. But, because pensions don’t provide positive benefits to teachers until they’ve served for 20 or 25 years, the NPPC’s definition of “commitment” excludes the majority of people of people who enter the teaching profession. To extend the metaphor, they really only care about the survivors in a war of attrition. They’re also overstating the teacher effectiveness research a bit, but, regardless, as a matter of public policy affecting millions of workers, we should work to ensure they ALL have retirement security.
Later they state:
State and local governments offer defined benefit pensions to their employees in order to attract the best and brightest to public service. Public employees earn less on average than their counterparts in the private sector, so job benefits like pensions are a proven way to recruit top talent. Also, as discussed above, pensions play a key role in retaining employees in professions like teaching and firefighting.
This claim is not backed by research. To begin with, we don’t have good evidence on how much pensions affect teacher recruitment. Some teachers might choose to teach because of the promise of a pension, but the long wait for a decent pension also might deter some qualified candidates. Moreover, extremely high (and rising) pension costs have played a role in keeping teacher salaries flat in recent years, and those costs have also contributed to large cuts in pension benefits for new teachers.
We do, however, have evidence on pensions as a retention incentive, and it's not nearly as positive as the NPPC claims. As Kelly Robson and I showed in a recent report for Education Next, state pension plans themselves do not assume that qualifying for a pension is enough to alter teacher behavior. At the back end, pensions do have a retention effect on teachers nearing retirement age, but that comes too late to affect teacher retention rates very much. Moreover, if we care about keeping veteran teachers, then we should be concerned about the much larger “push-out” effect that pensions have on teachers who reach the normal retirement age.
Later they revisit the broader argument about retirement security:
In the private sector, the shift from defined benefit pensions to defined contribution 401(k) plans over the past three decades has harmed the retirement security of working families. This is because most working families accumulate far less in retirement savings with a defined contribution plan than they would with a defined benefit pension.
This claim seems like it could be true, but it's not. As discussed above, there was no golden era of retirement saving. In fact, researchers have looked at multiple sources of data and found that today’s retirees are doing at least as well, if not better, than prior generations. (Lest you think anyone is cherry-picking data, the links in the prior sentence will take you to work published by the U.S. Census Bureau, the conservative National Affairs magazine, and the left-leaning Mother Jones.)
That doesn’t mean problems don’t exist—about half of all workers today still do not have access to a retirement plan at their jobs—but pension advocates are seizing on the problems of today in order to make a case for a past that never existed in the first place. It's understandable that as a trade group representing large pension plans, the NPPC doesn't want to have a conversation about why public-sector retirement plans like those offered to teachers are getting worse over time, while those offered in the private sector keep getting better. But that would be a more complete reading of the history.Taxonomy:
Tomorrow will be July 1st. For teachers that means summer school, prep for next year, and some well-deserved time off. For Major League Baseball fans, July 1st is Bobby Bonilla day. For any non-baseball fanatics out there, Bonilla remains famous not for his playing career, which ended in 2001, but for an odd deferred-money contract the New York Mets gave him in 2000. Instead of paying him roughly $6 million at the time, the Mets instead offered to pay him in yearly installments, paid out on July 1st every year from 2011 until 2033. In short, the club offered him something very similar to a pension.
Even though Bonilla was getting paid in the millions, his story relates to millions of teachers: In most cases a pension might not be worth it over the long run.
Let's unpack this comparison a little further.
In 2000, the Mets wanted to save some cash, so they delayed Bonilla's salary. In exchange Bonilla would receive a much greater, albeit delayed, sum. It seemed like a win-win. The club was deeply invested with Bernie Madoff and they (incorrectly) assumed that they would earn good returns in the market. Many pension funds make the same mistake. Nevertheless, the Mets were after much-needed financial wiggle room to make payroll, and giving Bonilla a contract worth more than a player of his caliber and age might have otherwise demanded seemed prudent at the time.
Teacher pensions are a lot like Bonilla’s deal.
Nearly all teachers receive a pension, also known as defined benefit (DB) retirement plan. Here is how it works. States and often districts pay a percentage of a teacher’s salary into a pension fund. Teachers also are required to make an annual contribution. At retirement teachers receive annual benefits according to a formula based on their age, years of experience, and an average of their final salaries.
Like the Bonilla arrangement, teachers forgo higher salaries today in exchange for more lucrative benefits tomorrow. This approach reduces how much money states need to pay in salaries and provides teachers with the opportunity to make up, and maybe even exceed, the difference later through the pension fund. A win-win, right?
Unfortunately, however, neither Bonilla nor teachers made out as well financially as one might have guessed. According to an estimate by ESPN last Bonilla Day, had he taken the money upfront and invested it, even with a conservative rate of return, he would have made more money. And for the Mets, they're still paying a retired 50 year-old over $1 million a year.
Most teachers get a raw deal as well. In the current pension system it takes teachers on average 24 years to earn a pension as valuable as the money they invested themselves. Many teaches would be better off financially if they could take their pension payments as salary. Or alternatively, a defined-contribution (DC) plan such as a 401k plan would produce a more valuable retirement benefit for most teachers.
The news isn't any better for states. Nationally, states carry around half a trillion dollars in unfunded liabilities. Pension funds in Puerto Rico and states such as Illinois and New Jersey face bankruptcy if they don't reform their systems.
The truth is that Bonilla, bad deal aside, will very likely be fine financially. For millions of teachers, however, it is a different ball game.
All teachers deserve a secure retirement. But under today’s current teacher retirement savings plans, more than half of all new educators won’t qualify for even a minimal pension benefit. We took a state-by-state look at public teacher retirement plans, and the findings were dismal. Here’s what we saw:
Retirement plans for public-sector workers, including teachers, are, by and large, getting worse. The last recession came down hard on state governments; so much so that, in terms of retirement benefits, now is the worst time in at least three decades to become a teacher. Those cuts fall hardest on new and future teachers, particularly those who do not plan teach in the same state for their entire careers. Our rankings aimed to capture these discrepancies, highlight areas of progress, and provide recommendations for reform.
We didn’t pull any punches – the reality of the situation is bleak, and it is important to share the facts. The majority of states are enrolling their teachers in expensive, debt-ridden retirement systems that fail to provide most teachers with adequate savings. These plans are unfair and unsound. We also aren’t the first to champion for pension reform. The Urban Institute has an excellent resource on public pensions, and our report draws on data from the National Council on Teacher Quality, in partnership with EducationCouncil. Our rankings build on these efforts in an important way, by adding in details to reflect the key differences between states. Teachers in California may have different needs than those in Idaho; these states may need to implement different policies to meet these needs. We believe states should design retirement plans that support their particular teacher workforce.
To measure the extent to which states have created retirement systems that match and adequately support their existing teachers, we created a grading rubric focused on two questions: 1. Are all of the state’s teachers earning sufficient retirement benefits? And 2. Can teachers take their retirement benefits with them no matter where life takes them? Our rankings use an equally weighted grading system comprising six variables that help answer our two guiding questions. Those variables are:
- The percentage of teacher salaries going toward retirement
- The percentage of teacher contributions going toward pension debt
- The percentage of teachers who qualify for employer-provided retirement benefits.
- The percentage of teachers who earn retirement savings worth at least their own contributions plus interest
- The percentage of teachers covered by Social Security
- Whether or not a portable retirement savings option exists
Our rankings paint a sobering picture. No state scored higher than a C, and most came in at an F. Overall, while states tend to be contributing enough toward benefits, they haven’t managed debt well or ensured that all teachers have access to adequate retirement savings. Few states have adopted reforms that would give teachers portable retirement benefits with the freedom of mobility or other personal or career choices. Others do not offer Social Security coverage to their teachers, depriving them of a solid base of retirement savings. It’s also important to note that just because a state has managed its debt costs reasonably well does not necessarily mean its plan is working well for teachers.
New York is one such example. The state does okay overall in our rankings, coming in ninth. Debt costs are low, but the state requires new teachers to stay 10 years before qualifying for retirement benefits. This leaves 60 percent of the state’s teacher workforce without any pension benefit at all. Similarly, Wisconsin has debt costs of just 1 percent of teacher salaries, but teachers are left out of Social Security coverage and must stay in the classroom 21 years before they break even on their own contributions plus interest. Both states have managed their finances reasonably well, but neither one is truly meeting the retirement needs of their teacher workforces. In fact, they’re managing their pension finances on the backs of teachers, at least in part, by perpetuating heavily back-loaded systems that reward a few at the expense of most teachers.
Something needs to change. Our teachers deserve better, and while specific action steps will vary state-to-state, we believe all states should aim to provide all their teachers with a secure retirement. They can start by:
1. Getting their finances under control
2. Making portable teacher retirement plans the default, to provide all teachers with financially secure benefits
3. Expanding Social Security coverage to include teachers
More money for schools is good news. It’s even better when a large portion of those funds will be distributed equitably across the state. In California, the state recently approved a new budget that includes a one-time payment of roughly $1 billion for the state’s school districts. This amounts to more funding than is required by the state funding formula. It’s big news.
But don’t pop the champagne just yet.
School district expenditures for the state’s teacher pension fund (CalSTRS) will increase by more than $1 billion annually until 2020-21. In other words California will need to make this onetime payment every year until 2021 to fill the budget gap created by the increase in districts’ pension spending. As it stands now, the state’s school districts will be around $3 billion short.
Without any additional help, districts will likely need to cutback in other education expenditures to be able to fund the pension system. This consequence makes clear that pension spending cannot be separated from school funding. One affects the other.
Unfortunately, the new state budget won’t help either despite allocation an additional $6 billion from the state’s reserves to pay its public employee pension fund. Nearly doubling the state’s investment into the public pension system this year will reduce the fund’s long-term debt and save taxpayers billions in the long run. And while that is good news for the state’s own pension obligations, it will do nothing to help districts make their payments this year.
California may at first look like it is increasing funding for school districts, but in reality this budget serves only to blunt the impact of rising pension costs for a year. It’s a Band-Aid too small to cover a gaping wound. Barring a massive increase in K-12 education spending, pension reform is necessary to actually grow school district budgets and to direct more funds to schools.
Last winter, I wrote about an effort in Michigan to reform the state's teacher retirement plan. At the time, Republican lawmakers were pushing to close the state's defined benefit pension plan to new workers and instead enroll all new teachers in a defined contribution plan identical to the one offered to other state employees.
In anticipation of a similar bill coming up again this year, we created a Michigan-specific version of our 3-minute pension "explainer" video. If you want a simple, easy way to quickly understand the debate over pensions in Michigan, you might start with the video below:
As fate would have it, the story we articulate in the video is now playing out in Michigan. Legislators continued to push for reform, and this week they agreed on a new version of the bill. It would set a portable defined contribution plan as the default, but it would also allow teachers to opt-in to a pension plan if they chose to. The authors of the bill argue it would be better for teachers and taxpayers, but Michigan union groups are attacking the bill as being anti-teacher.
Who's right? Well, consider how bad Michigan's plan is today. In a report released this week, we analyzed every state's teacher retirement plan. Along with most other states, Michigan earned an "F" grade. Here are the basic stats:
- Only about half of all incoming teachers will stick around for 10 years, the minimum required to earn a pension;
- Less than one-in-ten young teachers will teach in Michigan for their full career and reap the large back-end benefits promised to them;
- The current "hybrid" plan is dominated by its defined benefit component, and it has no way to keep costs in check over time if its assumptions prove inaccurate; and
- Michigan districts are currently contributing about 22 percent of each teacher's salary toward the pension plan, but most of that is being used to pay down past debts, not to pay for actual teacher benefits. In fact, about 80 percent of school district contributions toward the pension plan today are going to pay off past debts, not as benefits for current workers.
Combined, this leaves Michigan teachers in an expensive, back-loaded system. The vast majority are losing out in terms of retirement benefits, and all of them are losing out because their employers have to keep paying down pension debts.
The new legislation won't solve the state's existing debt problems, but it will prevent the state from accruing new debts in the future. And more importantly, it will enroll new teachers in a portable defined contribution plan, with a shorter vesting period and more money going toward teacher retirements. That will cost the state more money, but it's a win for teachers.