We know that traditional pension plans can push veteran teachers out of the classroom. But could pension reform draw them back in?
Survey responses released through a Learning Policy Institute analysis of National Center for Education Statistics data, “Solving the Teacher Shortage,” suggest teachers who left the classroom consider the ability to maintain their retirement benefits very or extremely important in their decision to return. So important, in fact, that pensions rank as a bigger obstacle than salary, class sizes, and child care availability. Here’s the breakdown:
The vast majority of teacher pension plans financially incentivize retiring at a set age, often around 60, regardless of an individual teacher’s situation. Inevitably, there are some effective veteran teachers who must then choose between continuing their work in the classroom and literally losing money. The survey respondents seem to capture a piece of this dilemma — teachers who have left the profession but would consider returning, should their retirement benefits allow them to do so.
We’ve discussed this before, but the push and pull on veteran teachers also has an effect on students. Findings suggest that if experienced educators did not face the pressure of a backloaded retirement system with large peaks and valley, but were instead offered a smooth, steady benefit accrual, more teachers would stay in the classroom for longer. This would increase teacher experience levels, and lead to better outcomes for students.Taxonomy:
For some professions, it’s all about: “location, location, location.” For online start-ups, you probably want to be in Silicon Valley. If you want to work on the stock market, head to New York City. But for teachers, where you work doesn’t matter, right?
According to WalletHub’s recent analysis, there is significant variation in teacher job quality from state-to-state.
But WalletHub’s rankings shouldn’t be taken at face value. And, as with any aggregate state ranking, the devil is in the details. About 14 percent of their total Job Opportunity & Completion Rank is based on the cost-adjusted “average” teacher pension in each state.
That’s a big problem. Averages can easily distort what’s actually going on.
Evaluating teacher retirement systems based on the average pension is misleading, because the majority of teachers do not even receive a pension. In Washington, D.C., for example, the average teacher pension is extremely high at almost $65,000, but only 29 percent of teachers ever qualify for a pension. So rating D.C.’s pension system on the average benefit of those who remain misrepresents the retirement realities teachers face. Simply put, a state’s average pension value does not provide much useful information about the quality of teachers’ retirement.
There are a couple of ways WalletHub could have evaluated state pension systems more effectively. For example, they could have used a vesting rate. This would grade states on the percentage of teachers that actually qualify for a pension. But even that won’t address other important concerns, such as whether teacher retirement benefits are portable or whether a state’s pension system is financially stable.
In WalletHub’s defense, teacher pensions are complicated. In fact, this points to a larger problem: teachers often lack sufficient information about their retirement. What is the vesting period? Do I qualify for Social Security? What is the retirement age?
The answers to these questions matter.
Most teachers don’t qualify for a pension and around 40 percent of teachers aren’t covered by Social Security. It is unclear how many teachers know these facts. And with many teachers beginning and ending their teaching early in their professional life, it is doubtful that retirement is at the forefront of their minds. Nevertheless, we must do a better job of presenting teachers’ pensions as they actually are: a retirement system that is misaligned with most teachers today.
It was May of 2012 and, like many other states, Kansas’ state-based teacher retirement plan (part of the Kansas Public Employee Retirement System, or KPERS) was in trouble. Facing a looming $8.3 billion unfunded pension liability, the state’s financial situation looked grim. As a response, legislators voted in a new retirement option, called a cash balance plan, for teachers hired on or after January 1, 2015. Below, we take a look at what the plan offers, and how it's worked out a year and a half later. Here's the breakdown:
What is a cash balance plan?
A cash balance plan is a hybrid, combining aspects of a defined contribution, 401(k)-style retirement plan within the format of a defined benefit plan, like most pensions. Individual employee retirement balances are stated in terms of an account balance, rather than a formula, but the employer takes responsibility for investing the assets and guarantees at least a minimal level of return on those investments. Kansas isn't alone in adopting this format. We've covered a similar cash balance plan in California, which offered most workers a better deal than the state's existing pension plan, and Nebraska's version has been lauded by both Pew and The New York Times.
How does it work?
In Kansas, enrolled employees automatically contribute six percent of their salaries to the plan, and the state then invests the money and guarantees at least 4 percent annual interest. This guaranteed interest rate sets the cash balance plan apart from retirement plans like 401ks where workers are left on their own to invest and are subject to the ups and downs of investing in the stock market. In addition, teachers also earn retirement credits, based on a percentage of salary and years of service. These credits are earned quarterly, and the credit rate increases the longer a teacher works. The table below, created by KPERS, breaks this down further.
While these retirement credits, like traditional pensions, are available only at retirement, employees can withdraw their own contributions plus that promised interest should they leave employment.
Why is this particularly relevant in Kansas?
Sweeping income tax cuts were the cornerstone of Governor Sam Brownback’s re-election campaign, and his financial experiment has left the state’s budget gutted. While the vast majority of states would benefit from public pension reform, Kansas’ need is all the more pronounced. The cash balance hybrid plan is a step in the right direction, but more work needs to be done.
Where are they now?
Well, the cash balance plan didn't solve everything. This time last year, lawmakers voted to shore up the pension fund using a $1 billion bond; the bond has a roughly 4.7 percent interest rate, while the state is assuming they can invest that money and earn 8 percent interest. But in fact, KPERS officials reported that the fund earned just 0.2 percent during 2015 — a far cry from the 8 percent rate the state assumed. But that's not all. Last fiscal year, lawmakers also delayed a $100 million quarterly KPERS payment. They now have until June 30, 2018 to make the payment, plus the same 8 percent interest on that money. State legislators from both parties have expressed skepticism that even this delayed deadline will be met.
The traditional pension plans (KPERS 1 and 2), as well as the newly created cash balance plan (KPERS 3), are all paid from the same budget. The progress made in adopting a cash balance plan is commendable, but, unlike a 401(k) plan, it allows the state to continue to delay contributions. While it's unlikely, Kansas would run into trouble if enough KPERS 3 employees decided to leave the profession or move out of state, demanding their contributions plus the promised interest in the process. Kansas is making progress, and moving to a new pension plan might very well be good for new workers. At the same time, it hasn't solved all of the state's budget woes.
The post below was originally published on June 5, 2015, and has been updated to include the most recent data.
The Census Bureau’s annual Public Education Finances compiles total education spending and revenue across the entire country. The latest data, released earlier this summer, shows teacher benefits continue to eat away at school budgets. (The new data tell a similar story as our recent Pension Pac-Man report.)
Public school expenditures have more than doubled since 1992 (including inflation), and the percentage of those funds spent on teacher benefits has increased as well. The percentage spent on teacher salaries, however, has dropped. The table below captures various education expenditures* by all public schools across the country over time.
Employee benefit expenditures include costs such as retirement plans and health insurance. School district expenditures on benefits leapt nearly 110 percent since the early 2000s, and climbed steadily over the past four years as well, now taking up over 22 percent of school district spending. Spending on salaries increased by just 39 percent during this same window.
As a share of total expenditures, benefits are also increasing; they now eat up roughly 6 percentage points more than in 2001. Over the same time period, the percentage spent on teachers’ day-to-day wages has declined, down almost seven percentage points since 2001.
The changing ratio of salaries to benefits is troubling. Increasing spending on benefits saps already limited funding, and prevents districts from taking on new teachers or rewarding experienced ones with raises. A low starting salary can also serve as a deterrent to those considering the teaching profession and could potentially keep talented new graduates from pursuing teaching roles.
*Note: Data do not include capital costs or debt, just current spending
Pensions are complicated. Here at TeacherPensions.org, we try to break down those issues and make pensions more understandable for teachers, policymakers, and the general public. There are other groups doing great work on the pension issue as well, and yet myths persist and actual policy successes are still too rare.
A new organization called the Retirement Security Initiaitve (RSI) is trying to break that logjam. To learn more about their work, I spoke with Dan Liljenquist, a member of RSI's Board of Directors, and a former Utah State Senator who helped steer groundbreaking pension reform through his state's legislature. What follows is a lightly edited transcript of our conversation:
Aldeman: Can you tell us a little bit about yourself and how you came to work on the pension issue?
Liljenquist: Well, I was elected to the Utah State Senate in 2008 and when I met with the Senate President that day, he gave me an assignment to serve as the chairman on the retirement committ
ee with what, at the time, he felt were comforting words. He said, “Don’t worry, nothing ever happens over there.” I took office right at the bottom of the 2008-9 financial crash, and all of a sudden we had a major pension issue on our hands.
Utah has always done the right thing with its pension system. We fully funded it every year. We set pretty reasonable benefits. But one year’s worth of market losses blew a 30 percent hole in our fund. We realized that paying off those losses would be the equivalent of taking 8,000 school teachers out of their classrooms for 25 years to pay off one’s year worth of market losses. We knew we had a system that needed to be reformed.
I got involved in the State Senate as the Chairman of that committee, and in 2010 we ran reforms that moved all new employees into a retirement contribution style plan that capped the liabilities to the state moving forward but also still provided adequate retirement security to the new employees.
Can you say more about that last part? There are a lot of critiques about defined contribution plans. What steps did you take to provide retirement security for all workers?
There are a whole bunch of ways you can do defined contribution plans. When people think of defined contributions, they usually think of standard 401k plans. That’s not what we did in Utah. When we say defined contribution, we set a defined amount that the state was willing to pay towards retirement for its workers, and we gave people a choice for how they could receive those contributions: They could enroll in a 401k-type plan that was professionally managed with low fees, or they could use the contribution from the state—again, a set amount—towards a defined benefit/ defined contribution hybrid plan. In the latter option, the state would still have its contribution capped and the employees would have to kick in any excess contributions if the defined benefit portion went beyond the state’s pre-determined contribution amount.
From a state perspective, this allowed us to cap the liability for state taxpayers while letting workers choose a benefit structure.
Can you tell us about your new work with the Retirement Security Initiative? What do you hope to accomplish?
We realized there are a lot of people out there doing really great work on the 501(c)(3) side educating people about the pension issue. In fact, we see better analysis and better understanding of pension-related issues than ever before. But what we realized is that there’s a gap between having the analysis and actually getting reforms passed. It’s a very complex issue, and it’s very difficult for policymakers to move forward. They have to not only piece together all of the information and make sure they have the relevant facts and policy levers to craft solutions that work for their jurisdiction, but it’s also it’s very difficult to move this issue forward when opponents of these types of reforms scare people and say that reforms will damage individuals and the retirement of current employees and retirees.
So typically it’s very difficult for a legislator to do this on their own. I learned that personally, it was exceptionally difficult for me to do and I had almost no support. So with the Retirement Security Initiative, we created a 501(c)(4) organization to address this need. We are an issue advocacy organization, and we have three main goals.
One, we want to make sure that retirement systems meet every penny of the commitments they’ve made to current employees and retirees. This means that they need to fully fund their pension plan, they have to adopt good governance, and that the legislature is committed to meeting all of the commitments they have made to current employees and retirees. We want to make sure people get the pensions they deserve.
Two, we advocate new systems for new workers that are predictable in their costs and sustainable in the long term. One of the challenges with defined benefit systems as they’re currently constituted is they must try to make 60- or 70-year projections about how long people will live and how the stock market will do, and invariably those assessments tend to be too rosy in the out years. That means governments don’t pay as much today as they should. We’re interested in plans that are more sustainable and that ensure benefits are fully funded as promises are made, rather than back-loading costs.
Three, those new plans should provide adequate retirement security to new workers. It would do no good to eviscerate retirement for new workers in order to solve the budget problems of today. We want to make sure that any new plan puts in sufficient resources to ensure that workers can get to 60-70 percent income replacement by the time they reach retirement.
So, in short, we want to make sure plans meet their current commitments, new workers are put in more sustainable plans, and that those new plans provide adequate retirement security.
I’d love to drill down a little bit on this distinction between protecting the benefits for existing workers and retirees versus creating new plans for new workers. How do you think about communicating that nuance to legislators or the general public?
I think there’s a tendency to blame plan participants for accepting the current defined benefit plans. That is absolutely irresponsible to do in my opinion, because plan members took a deal that [state and local governments] offered them. That’s why I think the first priority is the commitment to current retirees and employees. Policymakers may not like that deal, but it’s the deal that’s been offered and accepted. If it ended up being a good deal for the workers, why should we be upset that somebody took a good deal that was offered to them?
Now, there’s some concern that the benefits for new workers are not rich enough and they’ll face significant hardship. We found that not necessarily to be the case. Obviously there’s going to be a transition period, but in many cases we’re actually advocating a little bit more money into retirement to avoid the long-term risk down the road. And so I think there’s when you look at the new plan you have to make sure that that new plan is independently analyzed and really look at the longevity of your employees, how much money you need to put away, what’s a reasonable return you can expect on those investments, and then kind of back in to what you need to contribute to get to a 60-70 percent replacement rate. That is standard actuarial science.
One of the things that traditional defined benefit plans have struggled to do is to keep up with the needs of new workers, and portability is one of those needs. In order to lower the cost of the plans, some plans have a 10-year vesting requirement. That means if you leave before 10 years, you get nothing. Particularly in the education space, states have tried to keep costs low for career workers, but in the process they hurt new workers or short-term workers, people who come in and teach for a few years and then move on to something else. In designing new plans, states can actually repair some of those inequities of the old-time benefit plans. It’s about understanding the various levers and understanding what your policy objectives are. Typically policymakers want more predictable retirement costs and want more portability to meet the needs of the new workforces. Those two priorities help frame reform efforts and guide policymakers to an acceptable solution.
Can you talk a little bit about how you will approach the work and what you think might be the biggest challenges?
Our approach at the Retirement Security Initiative is to work directly with legislative leaders who are interested in this subject. We work to make sure they are connected with various 501(c)(3) organizations out there doing pension work, such as the Pew Charitable Trust, the Reason Foundation, and others, to make sure they have the analytical resources to analyze different options and to understand different policy levers and how other states have used those levers. Occasionally we will express our own principles in relation to certain aspects as legislation gets drafted, but our main goal is to help legislators move legislation and get it done. We typically work with lobbyists in each state and make ourselves available to help policymakers talk about pension reform in a way that brings people along instead of polarizing people on the issue.
And do you see any bright spots out in the field? You can point to your own work in Utah, but are there other places you would point to for future legislators who might be interested in tackling this work?
One day, everybody is going to have to deal with this issue. I’ve been working on this issue for six years, and I’ve been encouraged that, as more and more data comes out, I see more and more interest in doing something meaningful. Part of that is the financial crisis really strained state and local budgets around the country, and if things get worse, some of these governments are going to be hard-pressed to continue to operate and meet their commitments. The sense of urgency has risen quite a bit. That’s the first step, you have to have a sense of urgency to do something.
I’ve also been encouraged by the major reforms over the last couple years in Utah, Kansas, Rhode Island, Kentucky, and Oklahoma. Pennsylvania is on the verge of reform, and Arizona passed a major reform for its public safety workers earlier this year with the direct participation of its police and fire union, so I’m encouraged that people are ready for reform. Again, when you explain that the objective is to help state and local governments keep their commitments to workers and retirees, it becomes an issue that everybody should be able to get behind.
What would be your first word of advice to a legislator who is interested in taking up this issue or learning more?
The first step is to learn your own system. There is no one-size-fits-all reform. Every need is different. Every state and city is different. And every state and city comes from a different governance angle. Workforce needs are different. Competitive marketplaces are different. So I recommend understanding your own system and how it’s working. There are a lot of great resources out there on specific states and external support to do targeted actuarial analyses on specific plans. You have to understand what the problem is before you come up with the solution.
Perhaps the most important message is reality is not negotiable. One day, every state will have to address this issue, and the earlier they address it, the more options they will have. Groups like the Retirement Security Initiative are here to help.
The following is a lightly edited transcript of a recent conversation.
Max: Before we talk about your experiences retiring from teaching, I’d like to hear a bit about what got you into the profession in the first place.
Shirley: Well, it’s a little bit embarrassing, but I originally didn’t do it out of any passion. I was an English literature major at NYU, and I couldn’t decide what I wanted to do with my life. It was 1971, and I had a few acquaintances who were going to law school, but I didn’t know any women going to medical school. It seemed to me in that day and age, women went to college to get a job for a few years, maybe in publishing, and then they got married.
Although it was the start of women’s lib, I still thought that marrying someone, having a beautiful home, and not having to worry about money was what I wanted. Even though intellectually women’s lib resonated with me, it was still somewhat new. It wasn’t something that I thought much about: Why don’t I go to law school? Why don’t I get an MBA? In fact, when I was in high school, the predominant pathway for women was to go to college and then on to secretarial school, such a as Katherine Gibbs, a well-known secretarial school for college grads. And then get a job as someone’s executive assistant.
So I decided that I better get an education degree since I needed to do something. I took all the courses and I took all the tests, but there weren’t any teaching jobs available in Manhattan at that time. So in the meantime, I got a job at Lord and Taylor as an assistant buyer. It sounded exotic to me, even though it was entry level. I made $7,000 a year. While I was there, I found out that the men in my position were making around $1,500 more. And at that low salary, that’s a huge difference! This really hit home for me. It was the first that I can really recall thinking about being a woman in the workplace. I went into the manager’s office and asked him about the gender pay gap. He replied, in a very nice way, as though it made sense, “You know, men have families that they have to support.” He didn’t think that was outrageous. I thought it was unfair, but I guess I accepted it as how things were.
I started trying to get jobs as a substitute teacher. Every time I found one, I would call-in sick to Lord and Taylor since I couldn’t afford to quit. I was asked to work at the same school quite a lot, so I got to know and become friends with the teachers and administrators. Eventually I got a job there. This took about a year in total. My first job was at Junior High School 56 teaching science since they didn’t have any English positions. I switched to English after about a year and a half.
Max: When you moved to Maryland, did you think much about your retirement or what to do with the money in your pension?
Shirley: When I left New York retirement didn’t enter into my thinking at all. I was moving to get married. I was 38 years old and I had previously decided that getting married and having a family wasn’t going to happen to me. So falling in love and having a family – he already had three children – was very appealing to me. (Editor’s note: New York City raised the vesting period from 5 years to 10 years in 2009).
No one at my school in New York City was really talking or thinking about retirement. The question only sort of came up during my last year—should we invest a few bucks with Fidelity or buy 20-year bonds? Interest rates were really high at the time so some teachers decided to put a little money away.
But since I was moving to Maryland for a new life, I gave it up and withdrew what little money there was in my pension fund. There was no question in my mind that I was doing the right thing. Not one of my friends said, you know you should keep the money in the pension or try to roll it over into another kind of account. It just really wasn’t on people’s radar. Most of us didn’t think about retirement, or what was going to happen in 30 years. Now I realize that was foolish on my part.
These days it seems like younger people do think more about retirement. It’s probably thanks in large part to their parents because we can see what a difference it would have made had we started saving when we were younger. You are all so much wiser than I was at your age.
Max: So now you’re living in Maryland, you have three kids from your husband’s previous marriage and quickly two of your own children. How did you handle your retirement then?
Shirley: I still didn’t think all that much about it at first. I had always heard that Maryland had a poor pension system—at least when I started in 1996. But then I got divorced, I didn’t have any savings, and I was on a single income without any child support.
It was a huge wake-up call.
I knew then that I had to put away as much money as I could. I went into HR, signed all of the papers for their 403b option. At the time the maximum I could contribute was around $10,000 per year. I always signed up for the max. Since I was putting away as much as possible, the fund has grown quite nicely even though it has only been 20 years. At 46 years old, retirement didn’t seem all that far off.
I wouldn’t be able to retire on my pension alone. In fact, the 403b is actually worth more per month than the pension. I’m just so fortunate that I had my mother, who helped financially; otherwise I don’t think I would have been able to save enough for retirement and support my family.
Max: You taught for over 30 years and yet, your pension alone is insufficient to retire on. That’s kind of incredible. What would you change about teacher pensions so that they can better serve teachers?
Shirley: I’m not really qualified to answer that. Is it fair to say that health insurance costs, even with Medicare, are just so much of a burden? Now that I’m making less money, I have to pay so much more for my insurance. I am participating in the Montgomery County health insurance plan, but the retiree has to carry a lot more of the burden.
I also think that – since you mentioned that a lot teachers don’t have the option of a 403b plan – that districts should provide teachers with that option. As I said, I couldn’t retire without it so I imagine other teachers would benefit from it as well.
Finally, I think that teachers should be able to take their pensions with them. It’s kind of absurd that I’m effectively paying a penalty for working, and for a long time, in two different states. People move and that shouldn’t cost teachers money.
Max: What do you wish you’d known about pensions when you were teaching?
Shirley: I can’t tell you how much I wish I could go back and realize that retirement age comes sooner than you expect. And it’s insane the way I just didn’t think about what my future would be like when I was young. It seemed so far in the distance that I couldn’t see that clearly that far off. I wish I had known more about teacher pensions. I also wish I knew then that I couldn’t bring my pension with me when I moved to Maryland. Keeping two different pensions means less money In the long run. With that in mind, I would have started to contribute to a 403b so much earlier.
Max: What advice do you have for new and current teachers?
Shirley: Contribute everything you can from the first day! Retirement comes so much sooner than you think. And make sure that you know your state’s vesting rules so that you can be sure to keep all the money that was contributed on your behalf to the pension fund.