South Carolina Governor Henry McMaster wants to shift all new teachers into district-run, portable, 401k-style retirement accounts. Although the details aren't fully available yet, the state already offers its teachers the choice to enroll in a well-structured defined contribution plan. That plan offers immediate vesting, a 5 percent employer match on contributions, and plenty of low-fee investment options.
Compare that to how bad South Carolina’s standard defined benefit plan is for teachers and taxpayers. Here are the basic stats on South Carolina's current plan:
- Less than 40 percent of South Carolina’s incoming teachers will stick around for 8 years, the minimum required to earn a pension;
- Less than one-in-four young teachers will teach in South Carolina for their full career and reap the large back-end benefits promised to them;
- Employee contribution rates have risen from 6.5 to 9 percent over the last ten years, meaning teachers are getting less in take-home pay for the same retirement benefit;
- South Carolina districts are already contributing about 13.4 percent of each teacher's salary toward the pension plan. That's up from 8 percent ten years ago, and a bi-partisan law passed earlier this spring will increase it by another 1 percent a year through 2022; and
- Most of those contributions are being used to pay down past debts, not to pay for actual teacher benefits. In fact, South Carolina employers contribute less than 2 percent of teacher salaries toward actual retirement benefits, which is below the national average and could leave teachers vulnerable to insufficient retirement savings.
Combined, this leaves South Carolina 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. While we don't know the full details of the new plan yet, pension reform would likely benefit South Carolina's teachers and students.
To better understand the current situation in South Carolina, please watch and share the 3-minute video below:
Hoping to earn more? Man up.
In 2016, the 35 highest paid University of California employees were all men. Not most, not the majority. Every single one.
But this disparity isn’t exclusive to higher education – though it’s worth noting that the majority of the university’s high earners were doctors, and four were men’s sports coaches – the state’s K-12 education system reflects a gender gap as well.
In a country were 76 percent of teachers are women, we’d expect to see females as lead earners in a state’s public school system. But that isn’t the case. Just 15 of the state’s 50 highest K-12 school district earners are women. That same gender wage gap extends into retirement – just 12 of the top 50 beneficiaries in the California State Teachers’ Retirement System (CalSTRS) are women. And while we don’t have data on the racial make-up of this group, historically, these numbers are even worse for women of color.
We’re a pension blog, so while there are several systemic inequities at play here, we’re inclined to dig into this last number, 12 out of 50 beneficiaries. Across the country, most teachers (nine out of ten) are enrolled in a state-based defined benefit pension plan, like CalSTRS. These plans allot benefits according to a formula, multiplying years of experience, final average salary, and a pre-set multiplier, typically around 2.5 percent. Here’s an example:
The final average salary variable works against women. It's not progressive at all, and the highest pensions go to the people with the highest salaries. In California as in most other states, the “teachers’” retirement system also happens to include a lot of higher-paid principals and superintendents, who are more likely to be men. We know that women make up the majority of the teacher workforce, but are then vastly underrepresented in higher-paying leadership roles. Survey data from the American Association of School Administrators (AASA) show that about 77 percent of school superintendents identify as male.
The fact that most of California's top pension recipients are men is a direct result of the state's back-loaded pension plan. A University of Arkansas study found that nearly two-thirds of CalSTRS entrants are pension losers. That is, the majority of California educators will either be ineligible for a pension or the pension they do qualify for is not worth as much as their own contributions plus interest. The current system creates a grous of winners and losers, and the winners are those who have both long careers and high back-end salaries. The people who fit that “winner” profile are disproportionately men.
Pensions are often billed as especially beneficial to women -- and, if a teacher were to spend the entirety of her career in the same system, she would earn a comfortable retirement. But we know that this isn't the case for the majority of teachers. In pensions as well as salaries, women are losing out to men.
A version of this article first appeared last year in The 74.
September means that football is finally here! After months of waiting, the new NFL season kicks-off tonight. I've got my fantasy football lineups (yes multiple) all set and I've thoroughly convinced myself -- at least for one week -- that the Buffalo Bills have a chance to be in the playoff hunt. September is a time of hope not only for NFL playes and fans, but also for students and teachers as a new school year begins.Teachers and NFL players have more in common that you might at first realize. Both in the NFL and in classrooms, rookies abound. We rely on rookie teachers more than in the past. In the NFL, more than 200 rookies joined the league in April. The commonalities don’t stop there. Neither teachers nor NFL players can expect to stay in their profession for very long. And, surprisingly, both teachers and NFL players are among the very few careers that offer a pension for retirement.The problem is that the pension system really isn’t very good for either.In the NFL, players now need five years of service before they vest and become eligible for a pension. In the world of pensions, that is a reasonable vesting period. But the devil is in the details: Most players don’t stay in the league long enough to qualify. The average career lasts only 3.3 years. The NFL disputes this figure and instead claims that for players who make a team’s 53-man roster as a rookie, the average career is 6.86 years.Based on these estimates, it’s reasonable to conclude that around half of all NFL players never earn a pension. Among those who do qualify, the average pension was worth $43,000 per year in 2014. They can begin to draw on their pension at age 55.It’s about the same for teachers. Around half leave the profession without a pension. But in 21 states, the vesting period is longer. And in 15 states, teachers need to work at least twice as long as NFL players to be eligible for a pension. Like NFL players, most teachers do not stay long enough, so when their teaching careers end, often they walk away with no retirement savings. To make matters worse, for those educators who do stay long enough to be eligible for a pension, it will take about 22 years to break evenon their contributions.In other words, for most teachers, their individual contributions to their pension are more valuable than the pension itself until they teach for more than 20 years.So for those of us keeping score, most teachers and NFL players are ineligible for a pension. But the NFL scores points because football players typically earn a pension that is more valuable than the average teacher pension in 46 states. And they are able to collect their retirement funds at an earlier age than most teachers.While the pension plan for the NFL does not serve its players particularly well, teachers fall far short of the goal line when it comes to their retirement. Here are the top six ways that teacher pensions are outperformed by the NFL pension plan:
So let’s recap: Neither NFL players nor teachers have a pension plan that meets the majority of their needs. But for teachers, the failure of the plan to provide a good retirement benefit is particularly costly.To fix this, states have got to stop the bleeding. They need to, at a minimum, offer teachers a pension that provides retirement security for all, or a portable retirement account with a savings match. This wouldn’t eliminate states’ current liabilities, but it would make sure that they don’t dig the hole any deeper. And, as any good football fan knows, when you’re down, the comeback starts with defense.
- Money, money, money! Football players earn, at minimum, hundreds of thousands dollars more than teachers. Although the value of an NFL player’s pension does not depend on his salary, it does for teachers. So that means teachers need to work for decades and seek out the highest salary possible in their final years to maximize their retirement benefit.
- Social Security woes. Social Security is for everyone, right? Wrong. It is for football players. But in several states, teachers cannot participate in Social Security. In fact, about 1.2 million teachers are not covered by Social Security. Not only does this mean less money when they retire, it can also leave teachers particularly vulnerable to poorly designed pension plans.
- You can take your money with you. NFL players move around a lot. Even the Sheriff, Peyton Manning, one of the biggest winners from the NFL pension system, had to move once. Moving doesn’t affect their retirement funds. It makes sense that they can take their money with them. But this is not true for teachers. Their retirement benefits, even if they are vested, are not portable. That means any teacher who moves out of state has to leave that retirement fund there and start a new one in their new state. Keeping two pension plans can amount to hundreds of thousands of dollars in losses.
- Choices. NFL players have the option of opening a 401(k) account with the league in addition to their pension. In fact, the plan is really generous. The league will match player contributions at a 2-to-1 rate for up to $26,000. Most teachers have access to a portable retirement plan, but they rarely receive matching contributions from their employers.
- The NFL is a lucrative and stable employer. The NFL is at least a $45 billion industry with more than 12,000 current and former players. It’s in great shape. Players don’t have to worry – at least not seriously – that the league will go bankrupt or suddenly decide not to fund its pension. Teachers aren’t so lucky. Many states kicked the can for decades and now have billions of dollars of unfunded pension liabilities. In Chicago, home of the Bears, the district is estimated to be about $20 billion behind. To make matters worse, teacher pension funding is handled by ever-changing state legislatures. One year they might get policy makers who meet their pension obligations. The next year, they might not. Yikes.
- Teachers are vilified, while football players are idolized. Even though Comedy Central’s Key and Peele did a great teacher “mock draft,” I doubt anyone has a Fat Head poster of a teacher. The simple truth is that NFL players are revered. In Boston, Tom Brady can do no wrong. It’s pretty much the opposite for teachers. They’re called glorified babysitters; New Jersey Governor Chris Christie threatened to punch them; and they’re blamed for state fiscal woes.
A version of this article first appeared last year in The 74.
Want to see the future of school district budgets? Take a look at a slide deck presented this week by the Chief Financial Officer of the Los Angeles Unified School District (hat tip to reporter Kyle Stokes). The presentation was primarily about the rising cost of healthcare and post-employment benefits, but it included this alarming slide:
As shown in the graph, Health and Welfare (labeled “H & W” in the graph) benefits consumed 9.2 percent of the district’s budget in the 1991 school year. By 2021, they are projected to consume 18.5 percent of the district’s budget, rising to 28.4 percent by 2031. Pensions are similar: Los Angeles devoted 4.1 percent of its budget toward pensions 1991, but that will rise to 19 percent in 2021, and rise again to 22.4 percent by 2031.
Los Angeles is now considering a range of cost saving “opportunities,” primarily on the healthcare side, but assuming no policy changes, benefit costs for current workers and retirees will eat up more than half of L.A.’s budget by the year 2031.
As we’ve written before, this is a national trend, and it’s not a good one. It will compress teacher salaries and mean less money for books, field trips, libraries, foreign language, after-school programs, pre-k, etc. Like the Pac-Man game, benefit costs are steadily eating into the budget for everything else we care about in schools.Taxonomy:
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: