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:
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.