Teacher Pensions Blog

  • For the last nine days, West Virginia teachers have been out on strike over concerns about salaries and healthcare benefits. Much of the press coverage on the strike has focused on West Virginia's low ranking in average teacher salaries (see examples from The New York Times, USA Today, The Washington Post, CNNVox, etc.). 

    While it's true that West Virginia has low average salaries, this statistic misses out on lots of other things. For example, I've written before about how growing retirement costs are eating into teacher salaries, and it turns out West Virginia is a prime example of this. In fact, while West Virginia ranks in the bottom five states in teacher salaries, it ranks in the top five in terms of retirement costs (most of that money is going toward paying down unfunded liabilities, but it's a real expense incurred by the state and its school districts). Overall, West Virginia climbs to 32nd in terms of salary plus retirement costs. That's a very different story than the one being told by the media. 

    Of course, this also doesn't get into cost of living. West Virginia lands in the middle of the pack on cost of living, and if we adjusted the raw salary figures based on how far $1 would go, West Virginia teacher salaries would rank even higher. 

    None of this is to make a judgment about how much West Virginia teachers should be paid, but that argument shouldn't hinge on the "average teacher salary" metric. Without looking at all forms of compensation or adjusting for cost of living, average teacher salary rankings don't tell us all that much. 

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  • In February Illinois Governor Bruce Rauner announced his latest budget proposal. One of his money-saving ideas is to cut $2 billion in state spending by shifting teacher pension costs to school districts. While this plan has some merits, there nevertheless is a lot to dislike about this approach.

    In every state, pension benefits and pension contributions are made as a percentage of educator salaries. And since school districts set salaries, it makes some sense that they should carry the responsibility of financing the resulting pension costs. The issue, as Governor Rauner points out, is that districts can establish generous back-end salaries to attract educators, knowing that the increase in pension costs from those higher salaries will be picked up by the state. This disconnect can become an expensive cycle in which districts raise wages to compete for educators, leading to a tragegy of the commons. 

    There are a few problems with this argument.

    For one, there is a case to be made that districts, particularly those serving a lot of students living in concentrated poverty, need additional funds to encourage effective teachers to work in more challenging schools. And while the new state school funding formula will send additional money to high-poverty districts, it is unclear if it will be enough to offset the new pension costs.

    Also, it is disingenuous to suggest that lavish salaries and pension spiking are the main or even a primary reason Illinois’ teacher pension system is in dire financial straits. To be sure, higher salaries means higher pension payments. However, there are greater drivers of burgeoning state pension debts, such as the state legislature’s long history of underinvesting in the pension fund as well as increasing benefits during bull markets without ensuring long-term solvency.

    To avoid pushing out other education expenses to cover pension costs, communities could elect to raise property taxes. But of course, levying new taxes is politically and economically challenging. And even if a district were to raise new revenues, that would likely exacerbate existing inequities in school funding. Low-wealth districts will likely struggle to raise revenue to avoid pushing out other educational expenditures, while wealthier districts have the capacity to increase revenue more easily and avoid that trade-off.

    There is no denying that something must be done to address the more than $70 billion in teacher pension debt Illinois is carrying. But shifting the cost to districts and hoping that they can make up the difference is wholly insufficient and could cause greater damage to local districts and schools.

    The unfortunate truth is that the state of Illinois only has itself to blame for this problem. Getting out of it will take state-level solutions that, at the very least, provide new educators the option of opting into a different retirement savings plan that is actually more productive than the pension system for the typical teacher. Forcing districts and schools to raise local taxes or forgo other spending while cutting state pension funding may sound like a neat trick, but if anyone should be tightening their belt, it’s the state.

  • Earlier this week the Georgetown Center on Education and the Workforce released a new report looking at the gender wage gap. They found that even with the same education credentials and work in the same occupation, women earn only 92 cents for every dollar a man earns. Even when women choose the most lucrative majors, men still are paid more. In the words of the authors, “women can’t win.”

    In a forthcoming report looking specifically at teachers and administrators in Illinois, we found similar results. After digging into the data, we found that female educators on average earned 92 percent of what their male educators do. Our analysis shows that gender pay gaps exist even when narrowing in on certain roles and regardless of educational attainment.

    Stay tuned for more—or reach out to me at max-dot-marchitello-at-bellwethereducation-dot-org to receive an alert when it comes out.

     

  • Last week I wrote about a recent report from the Democrats on the Joint Economic Committee called “Retirement Security in Peril.” In my post, I narrowed in on some flaws in how the report talked about teacher pension plans. But after thinking about it a bit more, I wanted to zoom out and focus on some of the broader trends. I'm going to show four graphs to help illustrate exactly why the "retirement security crisis" put forward by the Democrats is almost exactly wrong. 

    First, the graph below shows the declining share of private-sector workers who have access to a defined benefit plan. This graph comes straight from the congressional report, and I've added some crude red markings to emphasize just how dramatic this change has been. In the Democrats' telling, defined benefit plans offer workers greater retirement security, and so the decline in DB plans must also mean a decline in retirement security. This fundamental narrative is wrong--retirement plan coverage does not equal retirement benefits for workers--and as a result it's also a misread of what's happened over this time period. 

    The next graph again comes straight out of the Democrats' report. They lead with the startling finding that the median retirement savings account balance in 2013 was only $5,000 (!). That's the median, and it means most American families have nothing saved for retirement at all. 

    That sounds really bad, and it is. But take another look at how the median has changed over time. On an inflation-adjusted basis, it dropped from $6,004 in 1998 to $5,000 in 2013. Although it's not pictured here, the same data source found that the percentage of families with retirement accounts inched up from 2013 to 2016, as did the median account balance of those plans. Regardless, it's hard to look at this graph and see any sort of golden age of retirement savings for American families. While things may not look great today, they never were. In fact, as I'll show in the next few graphs, things may actually be improving. 

    To focus more on outcomes, take a look the graph below from a recent report from the U.S. Census Bureau called "Do Older Americans Have More Income Than We Think?" This graph has a lot going on, but essentially the authors were looking at two sets of data. One, represented by the dark, solid lines, shows survey data, whereas the dotted and lighter-colored lines represent the authors' more complete portrait of income using administrative and tax data. On an inflation-adjusted basis, Americans aged 65 and older, of all income levels, have more retirement income than they did in the past. That trend shows up when you ask Americans in a survey, and it shows even up more when you check administrative and tax records. 

    These positive outcomes are occurring at the same time as fewer and fewer Americans receive defined benefit pensions. While the decline of DB pension plans certainly didn't cause these improvements, it's notable that the American retirement landscape is improving despite the changes going on across the country. 

    In the graphs above, there are some clear trends that retirement income is increasing faster for wealthier Americans than it is for those on the lower end. But that's likely a result of increasing income inequality, and we should be careful not to equate "inequality is increasing" with "low-income individuals are worse off." In fact, consider the next graph, again from the Census report. It shows that poverty rates among those 65 and over have fallen significantly over time.* Again, the survey data (represented by the top, darker line) is under-reporting the good news that shows up when the authors looked at actual income collected in administrative data (represented by the bottom, lighter-colored line). 

     

    In other words, the decline in defined benefit plans has not led to a decline in retirement security. If anything, the retirement landscape has actually improved a bit over time. It's theoretically possible that it's still too soon and the next generation of retirees will suffer from this change, but by now we should have seen that start showing up in the national data, and we haven't. In fact, the trends look pretty similar even if you look at recent retirees versus those who retired 10 or 20 years ago. The "Retirement Security Crisis" has been right around the corner for the last few decades, and yet it hasn't arrived. 

    *Meanwhile, child povery rates have barely budged over this same period of time, and the poverty rates of working-age adults (ages 18-64) are actually up a bit. 

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  • Earlier this month the Democrats on the Joint Economic Committee issued a report called “Retirement Security in Peril.” While they get some facts right, they also miss the forest for the trees. Worse, the story they tell about the retirement security offered to our nation’s public school teachers is dangerously wrong. Instead of praising those plans, congressional Democrats should be doing more to protect this large and important group of workers.

    First, it’s true that many American workers lack any retirement savings at all, and there’s been a shift in the private sector away from defined benefit plans to defined contribution plans. This shift has put more of a burden on workers to save on their own, rather than relying on their employer.

    But contrary to the narrative put forward in the report, these shifts haven’t harmed our collective retirement prospects. If the congressional Democrats had read a recent report put out by the U.S. Census Bureau, they’d recognize that our reduction in old-age poverty is one of our greatest accomplishments over the last few generations. Through safety net programs like Social Security and Medicare, as well as private savings that have proven surprisingly resilient, we’ve significantly reduced poverty rates among the elderly. Contrary to the “peril” described in the Democrats’ report, elderly Americans are less likely to be poor than any other age group.

    Democrats should be playing the role as vigilant watchguards of this progress, but that will require them to diagnose our true challenges more accurately. For example, rather than generic calls for “expanding” Social Security, we should be talking about how to make the Social Security formula more progressive to better cover low-income Americans with spotty work records and limited access to retirement savings plans.

    Moreover, the report’s descriptions about teacher pension plans are wildly out of touch with reality and attempt to paper over real problems in the public sector. Here’s what they write:

    Teacher pension plans are an example of the key role that defined benefit plans play in providing families a stable retirement. Teacher pensions, much like other defined benefit plans, provide a more secure path to retirement, helping many teachers overcome the multitude of obstacles that prevent saving for retirement. More than 75 percent of teachers participate in defined benefit plan. These pension plans reward longevity with an employer, creating economic incentives for high-quality teachers to stay in the profession. These plans serve as effective recruitment and retention tools for schools, helping attract and maintain the best teachers to ensure student success. Pension plans also afford teachers a more predictable source of income into retirement, which is particularly important for low- and middle-income teachers.

    This is little more than teachers’ union talking points, and it ignores a large and growing body of work about the problems with teacher pension plans. Here’s the truth:

    1. Teacher pension plans do work well for certain groups of teachers who stay in the profession for their entire career. But that’s only a small fraction of the workforce. Depending on the state, two-thirds to three-quarters of teachers don’t stay long enough to benefit from the pension system. Congressional Democrats should care about these people.
    2. Teacher pensions reward longevity within a state (not any particular employer), but the rewards are so difficult to understand and occur so late in a teacher’s career that few teachers react to them. When we looked at early-career teachers, we found that teachers will not put in even a single extra year to qualify for a pension benefit. A study looking at a costly pension enhancement in St. Louis found it only affected the behavior of a very small group of teachers who were right on the cusp of retirement. Another study out of Oregon also failed to find any effect.
    3. Unlike in the private sector, where Congress has taken steps to improve the benefits offered to workers and the funding stability of their retirement plans, public-sector plans lack those same basic protections, and the plans have adopted unnecessarily risky actuarial assumptions. For example, 15 states require teachers to serve for 10 years before qualifying for retirement benefits, which would be illegal in the private sector. Virtually every state-run teacher pension plan would fail the financial rules that Congress put in place to protect workers in private-sector plans.
    4. States have managed their teacher pension plans so poorly that they’re now under-funded by $500 billion. Due to rising costs, states have dramatically cut retirement benefits for new workers, and states and districts have been forced to scale back their spending on instructional costs, including on teacher salaries.  
    5. Forty percent of public school teachers do not participate in Social Security, but they should be. Back in the 1990s, Congress attempted to ensure that non-participating workers had benefits that were at least as generous as Social Security, but the implementation of that rule has been botched by the IRS, leaving too many workers unprotected from years of low retirement saving.

    I could go on. But rather than holding up teacher pensions as a space worthy of emulation, Congress should be holding hearings on some of these issues. 

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  • The benefit structure of pension systems is weird. The benefit an educator gets out of a pension fund is actually not a function of how much they contributed and the state contributed on their behalf. Instead, it is based on a number of factors, including: the age they enter and exit the system, their years of service, and their salary. That’s not how other retirement plans work. A defined contribution plan such as a 401k, produces benefits that are based on employee and employer contributions, plus whatever interest is earned on those contributions. Money out is a product of money in.

    As we’ve written on this blog previously, pension benefits are decoupled from contribution rates. As such, they can hide large cross-subsidies that typically transfer retirement wealth to the most veteran educators. In a new study of the Massachusetts Teachers’ Retirement System (MTRS), Robert Costrell and Dillon Fuchsman from the University of Arkansas find that 74 percent of educators are pension “losers.”

    In addition to the heavy back-loading of state pension systems, cross-subsidization is a big reason for so many educators earning benefits that are less valuable than their own contributions. What happens is that states’ report a uniform contribution rate, say 15 percent, with 5 percent coming from employees and 10 from employers. But no individual gets that 15 percent. Instead, the money is pooled together and awarded out via formula, and actual distributions can vary widely vary from individual to individual. And that variation tends to follow a few patterns that disadvantage newer entrants into the education profession and which favor long-term veterans.

    Costrell and Fuchsman find that, in contrast to the statewide uniform rate, some individuals will qualify for benefits worth 5 percent of their salary, while others will qualify for benefits worth 20 percent of their salary. They estimate that roughly one in four Massachusetts educators will be pension winners and receive benefits of greater value than the uniform statewide rate; the rest do not.

    In fact, a large group of Massachusetts teachers will receive pension benefits worth less than even their own contributions. How long that is the case depends on their age when they entered the profession. As shown in the graph below*, a 25-year-old entrant won’t qualify for benefits worth more than her own contributions unless she stays more than 30 years (the black line in the graph). Older entrants (purple line) become pension winners much more quickly and are more likely to receive retirement subsidies from younger and newer teachers.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    There are a number of reforms – ranging from relatively low-effort to completely reforming their teacher retirement systems – that states should consider. For one, they should increase transparency around contribution rates and the actual cost of benefits for individual educators. It is a problem that some teachers think they’re getting 15 percent of their salary toward retirement when in fact it is closer to 5 percent. But even that change won’t address the problem of massive unfunded liabilities that drive up the cost of pensions for educators and states. To tackle that, states should consider giving new educators the option of a cash-balance plan, or a defined-contribution plan that would, for the majority of new educators, actually provide a more valuable retirement benefit.

    *Source on the graph: Robert Costrell and Dillon Fuchsman, “Distribution of Teacher Pension Benefits in Massachusetts: An Idiosyncratic System of Cross-Subsidies,” University of Arkansas, Draft, February 2018, available at: http://www.uaedreform.org/downloads/2018/02/distribution-of-teacher-pension-benefits-in-massachusetts-an-idiosyncratic-system-of-cross-subsidies.pdf.