The conventional wisdom on saving for retirement offers two key principles. First, you should start saving early. And second, the wealth of your savings is directly related to how much you contribute to them. In fact, these two ideas form the basis of a Prudential commercial that frequently runs on TV.
For people in most professions the conventional wisdom more or less applies. But, unfortunately, it doesn’t for public school teachers. That is because nine out of ten teachers are enrolled in defined benefit plans that accrue benefits differently, based on state-determined formulas that multiply a teacher’s final salary by her years of experience.
A recent study from the University of Arkansas found that, in the California State Teachers’ Retirement System (CalSTRS), nearly two-thirds of entrants into the teaching profession are pension losers. That is, the majority of California teachers will either be ineligible for a pension or the pension they do qualify for is not worth as much as the money they themselves contributed to the overall pension fund.
This happens because most of the teacher’s own contributions, and the contributions made by the state on her behalf, actually subsidize the pension of more veteran teachers. It’s not until teachers stay in the classroom for a very long period when the value of her pension finally surpasses the value of the contributions.
The graph below illustrates the value of a teacher’s benefit (what pension plans refer to as the “normal cost” of benefits) broken down by entry age and longevity. It shows that less experienced teachers provide a considerable subsidy for those teachers who last in the profession longer. This pattern holds regardless of the teacher’s age when she enters the profession, although teachers who begin their careers at later ages earn a positive benefit after fewer years of working. Note that California teachers technically qualify for some pension after only 5 years, but even reaching that milestone does not protect against many more years of teachers cross-subsidizing more experienced veterans.
Source: Robert Costrell and Josh McGee, “Cross-Subsidization of Teacher Pension Normal Cost: The Case of CalSTRS,” University of Arkansas College of Education & Health Professions, October 24, 2016.
This happens because how much a teacher puts into the pension system does not determine how much she gets out. As a result, teachers do not qualify for much in the way of pension benefits until late in their careers, as they near retirement age. Thus, state pension systems (as illustrated above) are extremely back loaded and shorter-term teachers are subsidizing the retirement of teachers who stay their full careers.
This cross-subsidization presents a number of problems. The system lacks transparency, and teachers may not realize how much is being contributed on their behalf or how the system creates these cross-subsidies. The system overall may look “cheap,” but it might be obscuring the fact that some portion of teachers will receive quite adequate benefits, while most teachers get much less. Also, the problem of cross-subsidies is compounded over time as teachers enter and leave the profession, contributing to cross-generational pension liability problems. And perhaps the biggest problem is that more than half of teachers are “pension losers” whose pensions have been compromised by this back-loaded cross-subsidized system.
Defined contribution plans such as a 401k or 403b account don’t have these problems. Under those types of plane, a worker’s retirement benefit is directly related to how much the employer and employee contribute to it, and how much those contributions grow over time. Those types of plans also avoid the problem of back-loading and therefore employees do not, in effect, have their retirement savings diminished if they leave the profession before reaching retirement age.
The graph below illustrates the value growth of multiple kinds of retirement plans. The data assumes a teacher who entered the workforce when she was 25. It’s clear from this graph that the retirement savings of the majority of teachers today would benefit considerably if their state offered a DC or a cash balance (CB) plan instead of their traditional pension. In fact, the DC plan provides a teacher with greater retirement wealth except for the very few teachers who spend their entire career in the classroom in the same state.
Source: Nari Rhee and William B. Fornia, “Are California Teachers Better off with a Pension or a 401(k)?,” UC Berkeley Center for Labor Research and Education, 2016, available at: http://laborcenter.berkeley.edu/are-california-teachers-better-off-with-a-pension-or-a-401k/.
To better serve teachers’ retirement needs, states should at least provide newly hired teachers with the option to avoid the traditional state pension system, instead choosing a more portable defined contribution plan. This would be better for teachers and help keep states from continuing to add to their burgeoning unfunded pension liabilities.
- As we close out 2016, the major events of this year will likely shape the policy conversations around public retirement for years to come. We've collected a highlight reel of teacher pension posts to capture the year's developments. Our most popular posts of 2016 are below.ResourcesPeople are curious; our top source of incoming traffic are readers who want to know how public pension issues affect them and their communities. Our most-read content consistently features pension resources, fact sheets, and maps that break up pension data by state.
Teacher-FocusedCurrent state pension plans do not provide the majority of the teaching workforce with a secure retirement. Newly hired teachers lack portable, fair, or secure retirement plans, while effective veterans can feel financial pressure to leave the classroom sooner than they'd like.
- What Is the Average Teacher Pension in My State? The title here is about as straight forward as it can get. Interested in data on the average teacher pension in your state? See this post, but be sure to take into account the caveats around the "average" pension.
- How Does Your State's Pension Plan Compare? An Updated List of Pension Resources The resources here are designed to help teachers, reporters, policymakers, or anyone interested in learning more about teacher pensions in their state. Wondering where to find more information on a particular state’s pension debt? What about a particular state or municipalities’ pension plan? This post is your go-to resource.
- Map: The "Average" Pension of Retired State and Local Government Workers, by State What does the "average" retired state or local government worker receive in pension benefits? There's a map for that. The data here comes from the U.S. Census Bureau, and it shows the statistical mean pension benefit paid out in each state. Average pension benefits tend to be highest in the Northeast and in Ohio, Illinois, Colorado, Nevada, and California. Benefits tend to be more modest in the Bible Belt and the Northern Rockies States of the Dakotas, Montana, Wyoming, and Idaho.
- 10 States Spend More on Employee Retirement Costs Than on Higher Education We've watched pensions devour state and local education budgets, eating up dollars that could be spent on other public services. This post digs into the ways in which higher education is uniquely harmed by rising pension costs.
Retirement Writ LargeFinally, two of our most popular posts discussed the effect pensions have on broader retirement issues.
- A Tale of Two Teachers: A Retirement Story Here, we compare two teachers with different start dates. In every state, a teacher's pension amount is based on her final salary in the last year she worked, regardless of when that happened to be. In this way, pensions reward later-career service much more heavily than early-career service.
- The Pension Pac-Man: Still Eating Away at Teacher Salaries 2016 also brought the release of our report, “The Pension Pac-Man: How Pension Debt Eats Away at Teacher Salaries,” which used data from the Bureau of Labor Statistics to show that, like the insatiable Pac-Man, the rapidly rising costs of teacher retirement and insurance benefits are gobbling up funds that could be spent on salaries. Spoiler alert: the trends don't look good.
- What Was Behind the Rise (and Subsequent Fall) in Teacher Turnover? Curious about teacher turnover? We were too. While it may be tempting to blame teacher turnover on current education policies, Chad Aldeman explains how demographics and rising retirement rates offer a more plausible explanation.
- How Many Teachers Deserve Adequate Retirement Benefits? Some? Most? All? Today’s teacher pension systems only provide adequate benefits to teachers with extreme longevity. This post digs into the backloaded structure of most defined benefit retirement plans and argues that all teachers deserve a path to a secure retirement.
Still can't get enough? This post, Why Education Advocates Should Care About Pension Reform summarizes our push for bringing teacher pension reform to the forefront of the education policy conversation in 2017 and beyond.Taxonomy:
- Let's Not Kid Ourselves. There Were No "Good Ol' Days" of Retirement Saving We're busting myths left and right in 2016. Here's one more -- there's a common, widespread belief that the shift from defined benefit pension plans to defined contribution plans in the private sector led to a decline in retirement savings. Not true, says Chad Aldeman, and mourning the death of pension plans is longing for a bygone era that never really existed.
- Could Donald Trump Make Social Security Great Again? What woud a 2016 wrap-up be without an election post? While we'll have to wait and see how President-Elect Trump ultimately approaches Social Security, expanding the program to cover all state and local government employees, including all teachers, would provide workers with a baseline of secure, nationally portable retirement benefits.
Pennsylvania announced earlier this month that the contribution rate for its teacher pension plan will rise from 30.03 percent of salary last year, to 32.57 percent next year. Although that 33 percent employer contribution rate is already insanely high, it's scheduled to continue rising in the years that follow. By the 2021-22 school year, Pennsylvania school districts will pay 36.4 percent of each teacher's salary into the pension fund.
To be clear, most teachers will never see this money. Most Pennsylvania teachers don't stay long enough to qualify for benefits worth even as much as their own contributions, let alone the state's sizable contributions. The vast majority of the contributions are for debt that the state has accured after years of over-promising and under-saving. Billions of dollars a year must come out of state and district education budgets in order to pay down these debts.
Graphically, Pennsylvania's employer contribution rates look like a roller coaster (see graph below). A scary, painful roller coaster. While teacher contribution rates have increased only a bit, state and district contribution rates are much more volatile. They rose throughout the 1970s and 80s, then the unprecedented stock market boom in the 1990s allowed state pension contribution rates to fall all the way to 1 percent in 2002. Around that same time, pension plan assets looked flush, and so the state enacted a large retroactive benefit increase for teachers and retirees.
Those turned out to be terrible mistakes based on flawed assumptions. First the dot-com bubble burst, and then the Great Recession hit, and now Pennsylavania's teachers, schools, and taxpayers are paying the price.
Where will this roller coaster go next? Advocates of the current system suggest a wait-and-see approach. They argue that the state can't afford to get off, because the pension plan needs new money from new teachers.
It's true that Pennsylvania can't just pretend it never created this roller coaster. The unfunded pension liabilities are real and aren't going away. In fact, they'll remain even if the state hits its assumed investment target of 7.5 percent, and they'll grow if the state fails to hit that target. Meanwhile, it's not good for Pennsylvania's current or future teachers to ask them to pay down the pension debts through what is, essentially, a tax on their labor.
Instead, Pennsylvania should recognize that its pension debts were created by past state legislatures and governors, and the entire state should carry the burden of paying those off. That could involve other, dedicated sources of revenue, but it's unfair to keep forcing new teachers into an expensive, volatile, fundamentally flawed retirement plan. Pennsylvania can't afford to keep riding this particular roller coaster, and it nees to find a responsible way to shut it down.Taxonomy:
Glass ceilings aren't limited to the workplace, unfortunately. Because most states offer teacher retirement benefits based on their salary, states are extending the gender wage gap into retirement. Here's how.
The majority of teachers (76 percent) are female. The majority of superintendents (about 75 percent), however, are male. A recent Education Week piece dives into the reasoning behind this discrepancy, but rather than dig into the barriers female school leaders face, let's look specifically at the retirement issue.
Most states enroll all educators--teachers, principals, and superintendents--into one state pension plan, and it's usually named the "teacher" plan. But the largest payouts from "teacher" pension systems aren't actually going to teachers, the majority of which are female. Instead, the biggest winners are long-serving, highly paid administrators, who are predominantly male.
In 2014, we covered the release of the Empire Center's New York state pension database; the site lists the pension and services years of every current recipient. We found that, despite its name, the New York State Teachers' Retirement System (NYSTRS) writes its largest pension checks to administrators -- not teachers. In 2014, 14 out of the 15 highest retirement payments (ranging from $220,000 to more than $300,000 per year) went to former superintendents. The remaining top spot went to a research professor. Not one of the 15 retired as a school teacher, and all but one were men.
Not much has changed in 2016. Using the updated database, we examined the top 15 pensioners and found that 14 of them are former superintendents -- that research professor is still the lone standout. Two more women joined the mix though, bringing our total to three out of 15.
The NYSTRS benefit calculations explain why administrators are so heavily favored. NYSTRS maximum benefits are calculated using the following formula: Pension Factor x Age Factor (if applicable) x Final Average Salary = Maximum Annual Pension. The pension factor represents years of service, the age factor allows for a possible reduction should a member choose to retire early, and the final average salary is derived from a member's highest three or five consecutive school year salaries, depending on when he or she enrolled. Administrators (who are disproportinately male) out earn teachers; their average final salaries are much higher, leaving them ahead not only during their working years, but into retirement as well. The predominantly female teacher workforce is paying into the same system -- but getting far less. And unlike a system like Social Security, which awards lower-paid workers with proportionately higher retirement benefits, teacher pension systems include no such protections.
The chart below shows NYSTRS's gender breakdown. There are 204,184 actively enrolled females versus 63,351 men. Additionally, there are about twice as many female retirees as males, suggesting that males may be more likely to eventually draw any pension at all. But while the system is comprised mostly of female members, the system's biggest beneficiaries are overwhelmingly male.
New York's gender discrepancies are a product of the state's pension plan, not some fluke. They are simply one byproduct of a system that creates a small group of pension winners at the expense of the majority of employees who lose out under pension systems -- in New York, 60 percent of new teachers will not qualify for any pension at all (let alone a generous one). Pensions are often billed as especially beneficial to women -- and, if a teacher were to spend the entirety of her career, 25-30 years, in the same system, she would earn a comfortable retirement. But we know that this isn't the case for the majority of teachers. All teachers, especially those who have been historically underpaid, deserve a fair, portable retirement plan.
Nearly 100 years ago, states created teacher pension plans that were designed to serve a particular group of educators, especially women, who never married or had children. The publicly-funded systems were justified as protection for women who had taught for their full professional career, who likely didn’t have much in the way of personal retirement savings and would otherwise go without retirement support.
Pensions have evolved somewhat over time, but they’ve never escaped this original intent. Today, pensions provide financial security for those teachers that stay in the profession, but they also quietly push out veteran teachers. These leaders may have more to give to the classroom, but they are financially penalized for doing so. In a new paper from the National Bureau of Economic Research, Maria Fitzpatrick suggests those incentive structures may be having an impact on women's retirement rates more broadly.
Fitzgerald found that between 2000 and 2010, labor force participation rates of college-educated women between the ages of 60 and 64 jumped 20 percent. At the same time, as shown in the figure below, a lower proportion of these college-educated women were ever teachers. Fitzgerald’s paper suggests this is because fewer college-educated women are becoming teachers.
This has several implications. One, it’s a tangible sign that college-educated women have more career options than they did in the past. Whereas 30-40 percent of college-educated women born in the first part of the 20th century became teachers, today that figure is closer to 15 percent. The expansion of opportunities for women is undoubtedly a good thing, no question, but it also meant a smaller potential labor pool for schools.
Two, because 90 percent of teachers are enrolled in defined benefit pension plans that push out veteran teachers, these demographic trends have widened the gap in retirement ages. Figure 6 from Fitzpatrick’s paper shows that female teachers are exiting the workforce sooner than their non-teaching peers. Fitzpatrick argues that this is linked to teachers’ participation in defined benefit pension plans, which encourage retirement at ages earlier than Social Security. That disconnect, where teachers have earlier retirement ages and longer retirement periods, has broader societal and cost implications.
So what does this mean? Recent National Center for Education Statistics data show that retirement security is a driving factor in teachers’ career decisions. So much so, in fact, that the ability to maintain teacher retirement benefits ranked above salary, class size, and child care availability in teachers who had left the classroom’s decisions to return. Effective, veteran teachers deserve fair retirement savings plans that continue to grow in value, rather than arbitrarily peaking and plummeting at a set age. Pensions aren’t keeping up with a changing society.Taxonomy:
Everyone knows that teacher turnover rates are rising. So even though they’ve declined a bit recently, over the long term, national teacher turnover rates are up.
But what if the national, composite data aren’t the right way to look at teacher retention?
As I’ve written before, overall teacher retention rates are partly a function of teacher demographics. In general, retention rates for all workers -- teachers included -- follow something of a U-shaped pattern. Turnover rates are high for teachers early in their careers, decline over time and plateau mid-career, and then rise again near retirement. So if you combine all teachers into one overall average, your results will depend on what proportion of teachers fall into each of these career stages.
A better way to think about teacher retention would be to look at how many teachers reach various career milestones. That would allow a cleaner apples-to-apples comparison by looking at teachers who began their careers at different points in time. The National Center for Education Statistics (NCES) runs regular surveys that follow cohorts of teachers for a few years, but there’s no national dataset that I'm aware of that tracks individual teachers over long periods of time.
We can, however, use the NCES data to back into a reasonable approximation. NCES breaks down turnover rates* by teacher experience levels (1-3, 4-9, 10-19, and 20+ years of experience), and they update the data with new survey results every few years. By using these rates and updating them over time, we can synthetically “follow” cohorts as they age into the profession.
For example, NCES’ oldest teacher survey began in 1987-88. In that year, it found that 8.3 percent of teachers with 1-3 years of experience left the profession (meaning 91.7 percent remained). We can assume this group of teachers had the same turnover rate in years two and three (1988-89 and 1989-90). In year four, this group would jump to a new NCES experience category (teachers with 4-9 years of experience). Additionally, NCES released a new set of estimates in 1990-91, so the estimates must shift accordingly.
Using this method, I ran the numbers for the cohorts entering in 1987, 1990, 1993, 1999, 2003, 2007, and 2011. The graph below is the result.
The main takeaway from this analysis is that, contrary to conventional wisdom, teacher retention rates don’t seem to be changing that much.** The national averages appear to be deceiving us. Regardless of the year they started, about one-third of teachers had left within five years, and about half were gone within 10 years. Teacher retention doesn’t seem to be changing that much.
Since the graph is somewhat hard to read, here’s what the data look like in table form. Each column represents a starting year, and the rows indicate the cumulative retention rate by years of experience.
What is really going on here? I suspect two dominant trends have been shaping the national narrative about the changing teaching workforce. First, schools lowered student/teacher ratios by hiring more teachers than they lost. That meant schools were hiring lots of inexperienced teachers, which enhanced the feeling of system-wide churn even as underlying rates of teacher turnover didn’t actually change. Specific policy choices led us to a larger but less-experienced teacher workforce.
Second, even as districts were hiring lots of inexperienced teachers, the teaching workforce also got older. Existing teachers got older as the Baby Boom generation aged into the workforce, and even new hires were older than previous cohorts of new teachers. Due to retirement, older workers have high turnover rates, feeding into the feelings of higher churn.
These two trends could have shifted our perceptions of the teacher workforce even as the underlying dynamics didn’t change much at all. The analysis I’ve presented here suggests that the changing mix of teachers employed in our schools may be deceiving us. Teacher turnover rates aren’t rising, but we are employing more teachers who fall into career stages with high turnover. That's a different, more complicated story.
*For simplicity’s sake, I’m counting all teachers who stay in the profession as being retained. That is, I’m assuming retention is 100 percent minus the NCES “leaver” rate. There’s another group of teachers, “movers” who change schools, but this analysis is looking only at overall, cumulative teacher retention on a national basis.
** There are couple distinctions worth noting. First, the 1999, 2003, and 2007 cohorts all have slightly lower retention rates than prior groups of teachers. The differences aren’t that large—only a few percentage points—but they are visible. I don’t have a good explanation for why those years in particular were lower, but it may have been temporary. The cohort that began in 2011 is more in line with the earlier years and, in fact, has the highest 5-year retention rate of any cohort.
There’s also a visible kink at the 20-year mark. While late-career teachers do have high turnover rates, that’s mainly a function of retirement. They show up here at the 20-year mark due to the NCES categories. Because NCES lumps all teachers with 20 or more years of experience into one category, that captures a lot of teachers who are retiring. The high rates of retirement make the entire category have high turnover rates.Taxonomy: