Teacher Pensions Blog

  • WalletHub recently released its new rankings of the best states for teachers. This year, there is a new best and worst state. New York grades as the best state overall, while Arizona came in last.

    WalletHub graded states based on their opportunity and completion, which included salaries, pensions, growth, and even tenure. They then also took into account the state’s academic and work environment, which among other things, was based on student-teacher ratios, turnover, and union strength. Altogether, this ranking is based on a breadth of variables.  

    WalletHub made at least one key improvement from its rankings last year: They amended how they evaluate teacher pensions. Previously, they rated states solely on the average pension paid out to retirees. As I wrote last year, it is a big problem to evaluate a state pension system this way, because average pensions don’t tell the whole story of a state’s pension system. Less than half of teachers even qualify for a pension. Take New York, WalletHub’s highest rated state. It has an average pension of around $44,000 but only 40 percent of teachers stay long enough to qualify for one in the first place.

    To their credit, WalletHub responded to this criticism and upgraded how they assess the quality of state pensions. They now also include the percent of teachers whose pension doesn’t break even. In other words, teachers whose pension benefits are less valuable than their own contributions to the pension fund. This is a good decision by WalletHub that improves how they evaluate teacher pensions across the country.

    We have our own 50-state ranking of state pension systems. Check out how your state measures up.

  • A new report from the National Public Pension Coalition (NPPC) reminded me of Upton Sinclair's famous line, "It is difficult to get a man to understand something, when his salary depends upon his not understanding it." The NPPC is an advocacy group funded by pension plans, so it makes sense that they cannot fathom any reasons why traditional defined benefit pension plans might not be great for all workers. In their new report, they try to argue that traditional defined benefit pension plans are better for charter school teachers than 401k-style plans, but in the process they make some glaringly misleading assumptions.

    First, the report compares apples and oranges. Instead of comparing options that cost the same amount, the report ignores any notion of cost. If two retirement plans take the same contributions and make the same investments, they’ll get the same return. There's no magic sauce of pension plans, but the NPPC report tries to bury that fact by using wildly different contribution rates, and then assuming a much lower rate of return in defined contribution plans, despite recent data suggesting essentially no difference across different types of plans.

    Now, NPPC would have been on firmer ground if they acknowledged that some charter school retirement plans are cheaper than the ones run by states. That's not universally true, of course, but it would be a fair statement, and one that leads to a debate about what our priorities are and the right balance between upfront salary versus in-kind benefit costs. There are also a range of diferent retirement plans, and each has trade-offs. Instead, the NPPC implies that traditional defined benefit pension plans are always the best retirement plan, which is objectively false for large groups of workers, including many charter school teachers. 

    Worse, NPPC is stuck on the theory of pensions rather than trying to understand what happens in reality. Their comparison point in the defined benefit pension system is someone who teaches for 35 consecutive years (!). We’ve run the numbers on this using each state’s own actuarial assumptions, and here’s how many teachers reach 35 years in the eight states NPCC studies:

    California: 31 percent

    Florida: 9 percent

    Indiana: 7 percent

    Louisiana: 2 percent

    Michigan: 8 percent

    North Carolina: 0.4 percent

    Pennsylvania: 0.5 percent

    Wisconsin: 16 percent

    California is an outlier on the high end, where about one-third of teachers reach NPPC’s 35-year mark. But in most states, NPPC is making its statement about all workers based on a tiny fraction of teachers.

    The giveaway in NPPC’s report is that they don’t show how benefits accumulate over time. Instead, they only show comparisons in this very extreme case. But as we’ve shown in state after state after state, the vast majority of teachers leave before they ever get close to the large back-end benefits highlighted by NPPC. This is the reality of today’s teacher pension plans, and it leaves ALL teachers worse off, no matter where they work.

    It would be more intellectually honest if NPPC tried defend this position. If they came right out and said the only thing that mattered to them was providing high back-end benefits to a small fraction of the teacher workforce, we could have a reasonable discussion about whether the trade-offs are worth it. Given who pays for the NPPC’s work, they may be willfully blind to those trade-offs, but it leaves them making silly arguments in an effort to distract the conversation. 

  • About 2.7 million workers—1.8 percent of all Americans—are covered under one of two federal retirement programs, and earlier this fall the Congressional Budget Office (CBO) released a report reflecting on changing benefit systems and considering further changes to those plans. The report has some useful parallels to the retirement plans offered to teachers; here are two main takeaways:

    1. Pension reform can lower costs without significantly harming retention.

    From 1920 through 1983, federal workers were enrolled only in a defined benefit pension plan. It was generous for full-career workers, but less so for short- and medium-term workers, and at the time federal workers did not have access to the portablee, progressive benefits offered by the Social Security program.

    Starting in 1983, though, Congress cut the defined benefit component essentially in half, added a 401k-like defined contribution element, and began enrolling all new workers in Social Security. The CBO found that this three-legged approach provides much more portable benefits to workers with similar replacement rates in retirement, at a much lower and more predictable cost to the government. Although the CBO does see evidence that the switch lowered retention rates somewhat, the effects were small, much smaller than a subsequent retention boost observed after pay raises.

    As we've written before, we see similar patterns among teachers.  Too many states are still operating stand-alone defined benefit plans without Social Security and without any elements conducive to portability. Among the teachers who get close to retirement, pensions do exert a “pull” retention incentive as they near their retirement age, but several studies have found a much larger “push” incentive at the back end, effectively encouraging veteran workers to retire when they might have more to give. When states have reformed their teacher pension plans in the past, the effects on teacher retention have been minimal.

    2. Rising employee contribution rates can significantly weaken the benefits in traditional pension plans.

    The graph below shows the net value of the federal pension plan for employees who started after 1983. Importantly, it shows three lines. Each of these lines captures the same gross benefit—that is, all workers since 1983 have the same pension rules about when they qualify for a pension, the formula for that pension, and when they can retire and begin collecting their benefits. The only difference is the amount of money the employees themselves must contribute to receive this identical benefit.

    The top line signifies those who started between 1983 and 2011. They contribute just 0.8 percent of their salary, and almost the entire value of the pension is a net positive for them. That is, since they contributed almost nothing, all of their promised pension is a net positive to them.

    But once the contribution rates rise for the same benefits, the results start to look different. The middle line represents the net benefit for workers hired between 2011 and 2013. Because they must contribute 3.1 percent of their salary for the same benefit, their net pension benefit doesn’t reach positive territory until they’ve been on the job for 16 years. Now look at the bottom, blue line. This is what the federal pension benefit looks like today, for all workers hired since 2013. Their required contribution rate is 4.4 percent of salary, and their net pension benefit will be negative for their first 20 years of service.

    Even with the recent increases in employee contributions, it isn’t enough, and Congress, per the CBO report, is considering a range of different options, including further increasing contribution rates or cutting benefits.

    These trends are hardly unique to the federal government. States are in the midst of their own contribution increases and benefit cuts, and as a result today’s teacher retirement plans are worse than those offered to prior generations. In the median state, a new young teacher today has to remain for 25 years before her pension benefit cross into positive territory. 

    The CBO also includes an extensive analysis of different options for further reforming the system in the future, including shifting to a pure defined contribution system with employer matching contributions of 10 or 15 percent of pay. The authors conclude that such proposals could offer similar total retirement benefits to workers at a lower overall cost. Read the full CBO report here

  • 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:
    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    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.

    A  version of this article first appeared last year in The 74.