Teacher Pensions Blog

  • Illinois’ pension contributions have grown to over 20 percent of the state’s available general funds revenues; this limits other critical investments in education, social services and infrastructure, all of which are vital to the state’s growth.

    This sentence appears in Illinois' official Fiscal Year 2021 budget book, released just a few weeks ago in late February. It's likely badly out of date already, as the state faces mounting health care costs and falling tax receipts in the wake of the COVID-19 outbreak. Meanwhile, the state's pension systems are likely taking a massive hit in the stock markets, which will drive up pensions costs in the years to come. 

    This is not unique to Illinois, nor will it be new information to many of the state's residents. But it's striking to look at the trajectory over time to see just how much pension costs are strangling public education in the Land of Lincoln. 

    To get a sense of what that looks like, I collected data from the Public Plans Database on contributions toward public-sector pension plans. In Illinois, almost all of those contributions come out of the state's general fund, rather than being passed along to school districts or other employers. For my purposes here, I used something called "required contribution rates," which reflect the plan's best guess for how much the state needs to contribute in any given year in order to pay out future benefits down the road. 

    Next, I collected data on the state's direct spending on K-12 and higher education from the National Association of State Budget Officers. To get a sense of the state's spending on current students, I excluded expenditures on bonds and contributions from federal funds. 

    The first graph below shows the results on the K-12 side. As the gray line shows, Illinois' spending on elementary and secondary education has held up reasonably well. From 2001 to 2019, Illinois increased its K-12 expenditures by about $2.4 billion. Although this reflects the raw, unadjusted figure, Illinois' K-12 spending has also held up even on a real, per-pupil basis. 

    However, Illinois' required teacher pension contributions (represented by the red line in the graph) have increased much faster. Between the statewide Teachers' Retirement System (TRS) and the Chicago Teachers' Pension Fund (CTPF), the required teacher pension contributions have risen by $7.2 billion over the same time period. In fact, in 2019 Illinois' required teacher pension contributions surpassed what the state allocated for all other K-12 expenditures.  

     

    The story is similar for higher education, except that Illinois has not been able to protect its colleges and universities from budget cuts. Again, this isn't just an Illinois story, but states have been asking their public higher education institutions to do more with less, or else raise student tuition and fees to make up the difference. As in the first chart, the gray line in the next graph shows Illinois' declining support for public higher education. 

    The red line again represents required pension contributions, this time toward the State University Retirement System (SURS). Required pension contributions first surpassed the state's higher education spending in 2016, during a particularly bad budget year. The state's higher education budget has improved slightly since then, but the required contributions into SURS were again higher than what the state spent on all of its colleges and universities in both 2018 and 2019. 

    In raw dollar amounts, Illinois reduced its higher education spending by about $630 million over the last two decades. Again, that's in nominal dollars and is not adjusted for inflation or changes in student enrollment. Meanwhile, the required pension contributions into SURS rose by $1.9 billion over the same time period. 

    Of course, Illinois has not actually been making its "required" pension contributions. Over the last two decades, the state has contributed just 77 percent of what actuaries said it needed to pay into SURS, 70 percent of what actuaries estimated TRS needed, and just 56 percent of what  CTPF neeeded. That adds up to billions of dollars that should be in the plans today if Illinois policymakers had been more responsible in years past. Those shortfalls have also contributed to the dramatic rise in the required contribution rates. 

    While it’s hard to pin down causality, this period of rapidly rising pension costs has been associated with benefit cuts for active workers, including both teachers and other public-sector employees. Due to legal protections, Illinois applied those changes only to new workers. In effect, those changes handed a disproportionately large bill to future generations.

    Whether we’re talking about the effects on teachers or college students, Illinois and other states with high pension costs are punishing future generations to pay for the mistakes of the past. 

  • Today is Equal Pay Day -- our annual reminder that women do not receive equal pay for equal work. Although most educators are women, education nevertheless struggles with gender-based salary inequities. Pay gaps persist even though most school districts use a fixed salary schedule based on years of experience and educational attainment. Among teachers, principals, and superintendents, researchers have documented gender wage gaps. In 2018, I analyzed Illinois teacher salary data and found that across the state female teachers earn on average 92 percent of what male teachers earn. Race further complicates the problem. For example, Hispanic women earned about $4,000 less than Hispanic men, and white women earned $10,000 less than white men.

    A new study by Grissom et al., out of the Annenberg Institute at Brown University found similar patterns of pay inequities among principals. Using educator-level records, the researchers found that school principals in Missouri earn around $1,400 less per year than their male colleagues. And using the nationally representative Schools and Staffing Survey (SASS), they found that across the country female school leaders earn $900 less than male ones. Gender-based salary gaps can only be “partially explained” by career path choices, suggesting gender discrimination contributes to male-female pay differences in school leadership.”

    If you take into consideration an educator’s total compensation, including their pensions, the inequities increase considerably. As I wrote previously, any gaps in salary are reflected, and often are amplified through statewide teacher pension systems.  As shown in the graph below, women qualify for lower value pensions at every stage in their career.

    After 30 years, about the time many educators will be considering retirement, the gender pay gap is about $10,000. If two typical educators, one female and one male, retired after 30 years, the man would receive $8,000 more in pension benefits each year. After 10 years in retirement when they’re both about 70 years old, the male educator will have collected $80,000 more in pension benefits than his female colleague.

    It is critical that we better understand the causes and impacts of gender-based pay disparities in schools. However, we must also remember that the salary gap is only part of the disparity in total compensation.   

     

  • How will COVID-19 affect teacher pensions? The best way to answer that question is to answer it for specific groups: 

    Retirees will be mostly unaffected. There may be some states that pause or reconsider their policies around cost-of-living adjustments, but for the most part current retirees can rest assured that their pension checks will continue as before. 

    Teachers about to retire should also be unaffected. Teachers in this group should double check with their plan, but as long as they remain employed and continue their pension contributions, the current school year should count toward their "years of service" toward their benefits. If that is the case, teachers can continue to make plans just as before, knowing that the pension they were promised will still be intact. 

    Pension plan administrators will likely remind state politicians and the general public that public-sector pension plans are meant to be long-term investors providing patient capital to the markets. They will prefer to sit tight and weather the storm. 

    State governors and legislators will be handed a large bill from their pension plan administrators. We don't know yet exactly how large this bill might be, but that money will have to be made up somehow. 

    School district leaders should be prepared for sharing a portion of the pension bill. Depending on the state, that may come through lower state education spending, higher employer contribution rates, or a combination of both. 

    Current teachers are typically protected from any changes to their benefits, but they could see a rise in their own contribution rates. This will feel like a cut in take-home pay, and it means they'll be contributing more for the same retirement benefit. On top of that, teachers may also see their district freezing salary schedules, imposing hiring freezes, or cutting other services. 

    Future teachers will be hit the hardest. They will face the full brunt of any pension contribution rate increases. Plus, if states need to reduce their benefit costs, they often apply any changes only to future employees. That helps protect current workers and retirees, but it means the cuts on new workers must be even larger to achieve the same level of savings.  

     

  • Washington Post columnist Jay Mathews has a new piece on teacher pensions with a headline that reads, “So you think teacher pensions are too big? Relax. Few ever get them.”

    In other words, the truth is somewhere between people who think that teacher pensions are too generous and those who think they’re just fine. Jay lets Bellwether Education Partner co-founder and partner Andrew Rotherham explain:

    Rotherham, a former adviser in the Clinton White House and a former member of the Virginia state school board, has long been a leading expert on education policy. He told me more than half of people who teach never get any kind of pension. In 16 states, you have to be teaching for 10 years before you qualify.

    “People say we should reward longevity, and I think we should,” he said. “But life happens to people and lots of teachers don’t teach for decades in one place, not because they don’t love teaching, or aren’t good at it, or don’t want to, but because they have to move because of their spouse’s career, military service, a sick relative, whatever.” 

    Read the full column here

  • The following resource is designed to help teachers, reporters, policymakers, or anyone interested in learning more about teacher pensions. If you have additional questions that are not answered here, please contact us teacherpensions@bellwethereducation.org. We will continually update this page to help our readers. 

    • What is the average teacher pension? Here is our state-by-state chart, or more detailed looks at the average teacher pension in Illinois and California. Keep in mind that simple averages often don’t tell the whole picture.
    • How generous is my state’s pension plan compared with others? To see how your state compares, see how much your state is spending on teacher retirement benefits. 
    • Where can I learn more about a particular state or municipalities’ pension plan? How much do teachers contribute, what’s their cost-of-living adjustments (COLA), when do teachers need to retire? To find more information about pension plan components, check out your state's teacher pension plan website, browse through the TeacherPensions.org state pages, or scan the Urban Institute's State of Retirement Report Card. 
    • How much do teacher pension plans cost?  Check out the Public Fund Survey to examine funding levels, assets, liabilities, and other related information for the nation’s largest pension systems from 2001 to present. To see how much teacher pension plans costs by state, see here or see our report on the "Pension Pac-Man" for how pension spending translates for the average teacher. 
    • Where can I learn more about pension reform options and possible solutions? Read this handbook from the Reason Foundation to get a primer on possible options. Pension reform need not be limited to just a 401k-style plan and there are number of other alternatives for policymakers to consider. 
    • Where do I find more information on teacher retention in each state? State and municipal pension plans hold a wealth of data on their members, including calculations and projectios on teacher retention rates. This report from TeacherPensions.org and Bellwether Education Partners uses actuarial assumptions to estimate teacher turnover rates in every state. See this compiled chart from NCES' Schools and Staffing Survey for data on teacher experience levels in your state. For nationwide trends in teacher retention and turnover, see this post, or this post on how the teaching workforce is simultaneously older but less experienced
    • Which teachers receive Social Security, and why do some states not participate? For more information on teachers and Social Security, see this TeacherPensions.org report. Over 1 million teachers do not participate in Social Security and are concentrated in 15 states: Alaska, California, Colorado, Connecticut, Georgia, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio, Rhode Island, and Texas and the District of Columbia. See here for a quick history and explanation for why teachers don’t participate.

    Last updated on 3/9/2020.

  • As a country, we spend hundreds of billions of dollars a year on tax incentives for individuals to save for retirement--including employers that contribute toward those accounts. But do those incentives actually work? Do they change people’s behaviors? Are people satisfied with the results?

    A new paper from William G. Gale, Benjamin H. Harris, and Claire Haldeman surveys the landscape and finds that we don’t have good answers to these questions. They write, “policymakers do not have access to robust empirical consensus when making decisions that affect the retirement security of tens of millions of families.”

    I spoke with Harris about these findings and his ideas for a research agenda to begin to answer questions about how Americans experience retirement. What follows is a lightly edited transcript of our conversation:

    Aldeman: Can you give us a brief background of the paper. What were your goals in writing it?  

    Harris: I think that Americans hear a lot about retirement saving, and there’s a lot of anxiety about people being poorly prepared for retirement. Part of this has to do with some of the information that’s coming out of the financial services sector, part of it is the information coming from policymakers, part of it has to do with concerns about Social Security solvency, and part of it has to do with rising health care costs. For whatever reason, there’s a lot of anxiety and misinformation about Americans’ preparation for retirement.

    The point of this paper was to lay out a case for ways we can learn more about retirement and try to provide a pathway for policymakers to know more about ways to improve the retirement experience. We’ll get into the details later, but our idea was to say, “there’s a lot we don’t know about retirement, here’s how we can get to place where we know more.”

    On that front, you write, “almost no retirement policymaking is rooted in evidence; programs simply continue indefinitely with little or no Congressional oversight.” That’s a striking statement. Can you say more about what you mean by that, and what the implications are?

    Sure. The predominant form of subsidizing retirement saving in this country is through 401k-type plans, also known as defined contribution plans. These are plans where people get a tax exemption when they put the money in during their working years, the money grows tax-free, and then is taxed when people take out the money in retirement. There has been very little attention by policymakers to whether or not these types of plans are actually working. By “working,” I mean whether or not they’re boosting households’ savings.

    Now, we know there’s money in these plans, trillions of dollars. But the key question is whether or not they’re actually inducing Americans to save more. Someone could ask, “why does this even matter?” Well, it matters because we’re foregoing hundreds of billions in tax revenue every year in order to subsidize this type of saving. So the first big question is whether these plans are working, if they’re leading to higher rates of saving by Americans.

    The second general question is about how Americans spend down their retirement savings. Even thought someone might accumulate a lot of money in these plans, we don’t know if it leads to a better retirement. Does it allow them to retire when they want to retire? Does it allow them to take care of the heath costs that they need to take care of? Does it allow them to not be a burden on their children, if that’s what they want?

    The basic point is we’re giving hundreds of billions of dollars in tax breaks every year. Maybe we should pause to ask, “are these really working?”

    When we’re talking about retirement savings policies in this country, other than Social Security, we’re mainly talking about tax policies. But is the tax code the right lever to encourage retirement savings?

    That’s a great question. With retirement, we often talk about a three-legged stool, which refers to Social Security, private savings, and employer-provided retirement accounts. The tax code is the major lever for all of these. Workers get big tax breaks for saving in their pensions or 401k-type plans. Returns on saving outside of retirement accounts are taxed at lower rates, and the tax rate is zero on gains held until death. Even when we’re talking about Social Security, there’s a tax element as well, because retirees are taxed differently on their Social Security benefits than they are on other types of income.

    The tax code is the lever for much of our retirement policy. I think it’s a good question to ask whether we should think this through better, and evaluate whether it’s working as well as it could. It doesn’t have to be this way. Medicare is an example of a different way. Medicare does not have a big tax aspect to it, and it seems to be working well. So this tax issue is an open question and one we think worth considering.

    Could you talk a bit about the power of defaults? There’s a lot of work showing that “nudging” people into better retirement savings habits materially changes their behavior. Should we just create more nudges, or how should we think about nudging in this context?

    This is the big innovation in retirement saving, or in saving more broadly, over the past 10 or 15 years. Thirty years ago we thought it all came down to incentives. If we gave people a plus-up, some financial benefit for saving, that was really all we needed.

    There are a couple problems with that. The first is that the structure for savings are “upside-down.” By that I mean that if you’re in a higher tax bracket, your incentive for saving is higher. Each dollar you put into a retirement account is subsidized more than someone in a lower tax bracket. And if you’re not paying much in income taxes, there’s also an open question of whether you should be explicitly saving for retirement at all.

    The research on nudges has helped us realize that incentives can be unequal, and that incentives sometimes just don’t work. There’s a study we reference in the paper by Raj Chetty and his co-authors where they looked at Denmark {Note: see the paper here}. The reason that Denmark was a good country to study is that they collect data on every retirement saver in the country. They also had big changes to their retirement policy that made it possible to study people’s behavior. One of the interesting findings that came from the study was that it classified people as either being active savers or passive savers. They defined an active saver as someone who was paying attention to incentives and then responding to them. They found roughly 15 percent of people to be active savers. But if only 15 percent are really paying attention—and this is Denmark, so it could be different than the United States—then incentives don’t matter that much, because people don’t know about them and can’t respond to them even if they wanted to.

    Automatic saving is a way to get around that. The idea is that if you automatically put people on a sound savings path, people largely stick to that. There are some problems with that, of course, which we can talk about. But in general there’s been a shift in the thinking around retirement due to this type of research. If it’s the case that incentives don’t work that well, then automatically nudging people onto the right path is a more effective strategy.

    You mention the Chetty study on Denmark, and it’s clear in reading your paper that much of what we know about retirement savings come from European countries. Can you comment about why that is, and whether the studies on Europe are applicable to the United States?

    A lot of time we need a change in policy to study whether a policy works. In Denmark, it was helpful because we could see how people responded to a change in incentives. In the United States, we don’t have those same natural experiments to study the impact of savings incentives.

    The data here in the U.S. is another problem, and it’s becoming worse. People are getting saturated with surveys, they’re distrustful of people asking them about their personal information. I think that’s a perfectly reasonable response to developments in privacy, but the drawback is that the public surveys that we rely on are deteriorating in quality over time. It can be very difficult to find a quality dataset to study retirement security. If we had data like Denmark’s, then we would know much more about the effectiveness of incentives here. We don’t even have to go as far as Denmark, where they collected data on every single person in the country. Even if we just had a high-quality sample of people showing how their saving evolves over their life path, that would be tremendously effective in our understanding of retirement.

    In the paper you lay out a couple different paths for developing a research framework to evaluate our retirement policies. What sort of systems would that entail? Or how would we get to the vision you’re putting forward?

    There are three things we lay out in the paper, and they all seem pretty achievable. They’re not all that expensive, in the millions and not the billions, which is relatively small on the federal level.

    The first step is that we should evaluate tax expenditures. In the context of retirement savings, tax expenditures are mainly the tax breaks we give for putting money in a 401k or, for an employer, offering employees a pension. These have never been formally evaluated, which may be surprising given that we’re spending over $200 billion a year on them. Maybe we should pause for a second and evaluate whether they’re actually working. Private companies regularly take a step back and ask whether their strategy is working, whether that’s in retail or tech or finance. We think the government should do the same thing. There are a couple agencies within the federal government that are well-suited to evaluate tax expenditures. What we should have is a formal, ongoing process whereby government evaluators periodically study whether our policies are working.

    The second thing we call for is a 1 percent carve-out for program evaluation. This has long been a priority of Results for America, where I am affiliated and which was a sponsor on our paper. The idea is, for programmatic funding, we should carve out 1 percent for evaluation. That could be everything from randomized control trials (RCTs), where you assign a treatment and control groups and evaluate whether a given intervention had an effect on the treatment group. But it doesn’t have to be RCTs. The fundamental idea is to set aside $1 for every $100 in spending towards formal evaluation of programs to see whether or not they’re working.

    We specifically called out the Social Security Administration. To be clear, we’re not talking about 1 percent of all the dollars spent on Social Security. We’re talking about 1 percent of all the dollars spent on administering the program, which comes down to $1 out of every $7,000 spent on the program overall, including both the disability and the old-age program. Devoting that 1 percent toward program evaluation might help us understand more about how the program is impacting retirement. 

    The last thing we thought would be a good idea would be to put together a dataset that approaches what Denmark has. It would be a panel dataset that would follow households over time. It would link administrative data that the government already has on people’s participation in different government programs, as well as tax data and survey data that people report. The survey questions might include answers to questions like, “when do you want to retire?” “how do you feel about your retirement?” or “how healthy are you?” Having a dataset combining all those elements would allow us to know so much more about retirement, and that would allow policymakers to make reforms that ultimately make people better off in the long run.

    It doesn’t take a lot of money to do this. If we siphon off just a little bit, 1 percent from each program, we can make the programs much better.

    What are the biggest barriers to implementing this vision? Is it cost, inertia, fear of privacy, or what are the biggest obstacles?

    This is a great question. If I had to rank the problems, I would say the biggest one is what do you do when you find out the program isn’t working? What do we do if we find out that 401ks aren’t as successful as we thought? It’s tough to make policy decisions in the face of finding out that a program is ineffective. People like most programs, even if they may not be working all that well. That’s a big challenge.

    A second challenge comes down to funding. Even though 1 percent seems like a small number, we are budget constrained these days, and policymakers are always looking for cuts. Even a 1 percent add-on could feel like a tall order.

    The last thing I’ll say is on the data. We’re fighting this sea change on survey data. If you look at some of the work by Bruce Meyer and others, who have found that the rates of response are plummeting over time {Note: see the paper here}. It used to be that we’d see response rates of 60 or 70 percent. Those have been cut in half, and there are some questions some people are just no longer comfortable answering. People are reluctant to answer questions about their personal finances, and people don’t love that the government has this information and they’re sharing it with researchers.

    Everyone understands the importance of paying taxes, but there’s sometimes an expectation that that information stays with the IRS. When the IRS does share information, it’s incredibly powerful from a research perspective. Some of the best papers we’ve seen over the past 10 years, including papers written by Raj Chetty’s team, have come out because they had access to IRS data. But the IRS is so careful and cautious with the data it can be a barrier to implementing our third pillar.

    Are there any other points you haven’t mentioned?

    The last thing I’ll say is that in addition to a shift in our understanding of incentives versus nudges, there’s also been a big shift between the saving process and how we spend down assets in retirement. We’ve shifted from a world in which everyone got a pension, or at least most people who got a retirement benefit through the workplace had a pension, to one where we’re mostly just saving on our own in our individual accounts. The implied expectation seems to be if you saved enough you’d be okay. With expanding longevity and high out-of-pocket health care costs and other sources of uncertainty in retirement, we need to focus not just on how much you have saved in your 401k, but also on strategies for spending down those assets. Economists call this the “decumulation” process.

    That means retirement is not just about understanding how people save, but also the strategies people use to spend their nest eggs that they spent their whole life accumulating. Do strategies like reverse mortgages make sense? Should people buy annuities? Should we think about a better market for long-term care insurance? Those types of questions are only going to get more and more important as Baby Boomers get deeper and deeper into retirement.