Teacher pension funds are complicated and can be difficult to understand. They’re not as straightforward as other retirement savings accounts, such as 401ks, nor are they like traditional investments in stocks. In a 401k, for example, the value of the retirement fund is determined by employer and employee contributions, plus the growth of those investments over time.
Defined benefit pension plans, like the ones serving 90 percent of public school teachers, don't work that way.
To be sure, teacher pension plans are invested in the market. However, individual teacher contributions and those made on their behalf by the state or school district do not determine the value of the pension. Instead, a teacher's pension wealth is determined by a formula based on her years of experience and final salary.
To further complicate matters, there often are several tiers within a state’s pension fund that provide different levels of benefits based on when a teacher was first hired. And of course, teacher pension funds can vary significantly from state to state.
How Teacher Pensions Work in Arizona
In Arizona, teachers are a part of the Arizona State Retirement System, which includes not only teachers but all state employees. Indeed, the system was established in 1953 and teachers voted to join two years later.
The basic structure of Arizona’s teacher pension is similar to that of other states. The figure below illustrates how a teacher pension is calculated in Arizona. It is important to note, however, that the state assesses an educator’s final salary based on their average salary from the past 5 consecutive years.
Generally, states use a consistent multiplier, for example 2 percent, for all teachers. However, Arizona is unique and applies four different multipliers depending on the teacher's years of service. This approach provides slightly more generous benefits to those teachers who serve the longest. As shown in the table below, for the first 19 years a teacher’s pension benefit will be calculated with a multiplier of 2.1 percent. Once they begin their 20th year teaching, however, the multiplier increases to 2.15 percent.
Table 1: Arizona’s Pension Multiplier
Years of Service
Less than 20
20 to 24.99
25 to 29.99
More than 30
There are a few other features of Arizona’s teacher pension plan that make it unique. First, unlike most states, Arizona does not have a vesting period. This means that educators qualify for a pension regardless of how long they serve. That pension may not be worth all that much, and educators can’t begin to collect it until they hit the state’s retirement ages, but immediate vesting does at least ensure all educators begin to accrue pension benefits immediately.
The state sets specific windows when teachers can retire with full benefits based on age and years of experience. For new teachers just startting out in Arizona, they can retire with their full benefits when they meet the following conditions:
- Age 65;
- Age 62 with at least 10 years of experience
- Age 60 with at least 25 years of experience; and,
- Age 55 with at least 30 years of experience.
Additionally, Arizona allows early retirement at age 50 with at least 5 years of experience, but teachers taking that option have their benefits reduced based on their years of experience and how early they are retiring.
As they work, teachers and their employers must contribute into the plan. Those contribution rates are set by the state legislature and can change year-to-year. In 2017, both the state and the employee contributed 11.34 percent of their salary to the pension fund. This year the rates are the same, but that may not always be the case.
Finally, in Arizona, as with most states, teacher pensions are not portable. This means that if a teacher leaves the state she can’t take her benefits with her, even if she continues working in the teaching profession. As a result, a teacher who moves states might have two pensions, but the sum of those two pensions is likely to be worth less than if she remained in one system for her entire career. In other words, the lack of benefit portability will hurt the long-term retirement savings of any educator who leaves teaching altogether or who crosses state lines to work in another state.
Arizona’s Teacher Pension System Heavily Favors Teachers with More Than 25 Years of Experience
An unfortunate feature of teacher pension systems is that they are severely back-loaded. In other words, benefits accrue extremely slowly and thus educators only earn valuable pensions after decades of service. This structure may work well for teachers who spend their entire career in classrooms in a single state, but it does not work as well for those educators who change jobs or are more mobile.
The graph below illustrates the benefit accrual rate for a typical Arizona teacher who begins teaching at age 25. The first thing to notice is that benefits accrue very slowly until they teach for about 25 years. However, According to the state’s own projections, only about 19 percent of teachers will remain in the profession long enough to reach their 25th year of service. In other words, for most teachers Arizona’s immediate vesting does not translate into a valuable pension benefit.
Figure 2: How Retirement Assets Accumulate in the Arizona State Retirement System
There is a severe mismatch between Arizona’s teacher pension system and the educator workforce in the state. Pensions are great at providing valuable retirement benefits to those who spend their entire career in schools in one state. But the Arizona teacher workforce doesn’t fit that model. As a result, the vast majority of teachers in Arizona will leave their years of service with only meager retirement benefits.
Overall, Arizona’s teacher pension system is a bit more complicated than the typical state plan. But as with most state pension funds, Arizona’s teachers must remain in the profession for nearly three decades to earn a quality retirement benefit. With that in mind, new and current teachers in Arizona should think carefully about their career plans and how they interact with the state's retirement plan. Educators who leave the profession early, even if they qualify for a small pension, will unintentionally do damage do their long-term retirement savings.
Based on media reports, you might think that all public school teachers receive gold-plated health care benefits. While there are some outliers, on average teachers receive benefits that are slgihtly beyond average but not extravagant. Here are three key facts* that shape public perception around teacher health care benefits:
Fact #1: Teachers are much more likely to receive health care benefits than employees in other fields. This is a big discrepancy. Two-thirds of all employees in the private sector have access to medical care benefits through their employer, whereas 99 percent of public school teachers do. Teachers are also far more likely to receive retiree health benefits than their peers in the private sector.
Teachers are also more likely to have access to other health care benefits. Compared to their private-sector peers, teachers are more likely to have access to dental care (58 versus 42 percent), vision care (36 versus 23 percent), and prescription drug coverage (97 versus 66 percent).
Fact #2: Among those receiving benefits, teacher health care costs are slightly higher. In terms of medical care premiums, teacher plans are slightly more expensive, and teachers bear a slightly lower share of their costs than private-sector workers do, but the gaps are not as large as you might expect. Compared to private-sector workers, a higher share of teachers get their full medical premiums paid for (24 versus 15 percent). For single coverage, teachers receive a medical care subsidy from their employers worth about $6,168 per year, or about $961 more than what private-sector workers receive, 18 percent higher. Teachers themselves chip in an average of $1,175 toward annual premiums, compared to $1,384 for private-sector employees.
For family plans, teachers contribute $257 more than non-teachers, school districts contribute about $600 less than private employers, and the total cost of the plans are nearly identical (and actually a couple hundred dollars higher for private-sector workers).
Fact #3: Teachers receive medical coverage for a full calendar year, even though they may only work for 10 months. About 18 percent of teachers earn income from a second or third job to cover their mortgages or other household expenses, but when they seek outside employment, at least they don't need to worry about health care coverage. That is a protection not all workers have.
Adding up all these factors, the average teacher receives health benefits that are much better than employees in other sectors. But those differences are mainly driven by universal coverage, not the generosity of the underlying benefits.
In schools across the country, high teacher pension and benefits costs can crowd out other classroom spending. In Washington D.C., pension costs could pump the brakes on Metro services.
A recent GAO report found that, from 2006 to 2017, WMATA’s required employer pension contributions increased an annual average of 18.9 percent -- from $25 million in 2006 to $168 million in 2017. During that same time period, salaries and wages increased only slightly -- an annual average of 1.1 percent. Today, WMATA’s pension system has a $1.1 billion unfunded liability. That’s in addition to $1.8 billion in health care obligations.
The repercussions of this are fairly alarming. Metro Board Chairman Jack Evans told the Washington Post, “In five to 10 years, the amount of money that we have to pay out of the operating budget to fund the pension will be so high that we won’t be able to run the system.”
For their part, the GAO recommends WMATA first develop a comprehensive assessment of their pension plans’ risks, presumably to inform future actions.
The benefits squeeze on current employee wages is mirrored in the teacher workforce. As states funnel more resources toward unpaid pension debts, there’s less funding to increase salaries of existing employees.Taxonomy:
Earlier this week I had the chance to testify in front of a joint committee of the Arkansas State Legislature focused on Public Retirement and Social Security Programs. I used the opportunity to show that Arkansas' current plan offers solid benefits to long-serving veteran teachers, but it can leave 5-, 10-, or even 20-year veterans with insufficient benefits. My full presentation is below.
After defining an "adequate" savings threshold, I compare it to the current Arkansas Teacher Retirement System (ATRS) plan, as well as two other types of plans, a defined contribution plan currently offered to employees at the University of Arkansas and a cash balance plan currently offered to retirees in the ATRS system. As I show in the slides, the current ATRS plan has sufficient contributions going into it, and it does provide adequate benefits to workers who stay in the system for their full career, but that leaves many public school teachers without adequate retirement savings. The majority of Arkansas teachers will need to make up the gap somehow, by saving more in other jobs, working longer, or suffering from a less-than-adequate retirement. In contrast, other types of plans could provide more Arkansas public school teachers with adequate retirement savings regardless of how long they stay.
I also urged Arkansas legislators to focus on questions of benefit adequacy rather than concerns about the plan's effects on teacher recruitment or retention. As we've written before, retirement plans appear to be a poor tool to shape the workforce, and other factors are far more important for how teachers make decisions about whether to enter or remain in the teaching profession. As a result, state leaders should prioritize how well their retirement benefits are meeting the needs of workers. The teaching profession is too large, and too important, to leave without adequate retirement benefits. Click through my full presentation on Arkansas below:
While I was in Arkansas this week, I estimated that two-thirds of the state's teachers won't work long enough to qualify for adequate retirement benefits. Despite basing my estimates on the state pension plan's own actuarial assumptions, some legislators and audience members pushed back, arguing that the pension plan itself helps keep turnover down. As we've written before, the evidence does not support this argument, at least not for workers of all ages and experience levels. But the Arkansas data provide a few more reasons to doubt how much pension plans affect retention rates.
First, Arkansas teacher retention rates have fluctuated over time, even under the same pension plan. Using the state's own actuarial assumptions (drawn from actuarial reports here)*, I calculated five-year survival rates for teachers. The five-year survival rate is a nice round number, but it's also when teachers "vest" into the Arkansas Teacher Retirement System and first qualify for a retirement benefit. Here are the expected five-year survival rates for teachers at various points in time:
Five-year survival rate for Arkansas teachers, as of 2007: 51 percent
Five-year survival rate for Arkansas teachers, as of 2017: 60 percent
This may be contrary to public perception, but the Arkansas pension system at least is seeing lower rates of turnover than it did 10 years ago. These forecasts are based on historical data and are used in the state's official financial projections. The state's assumed teacher retention rates climbed 9 percentage points (about 17 percent) during the last decade, at a time when the pension plan benefits stayed more or less the same.
Second, as we've noted before, retention rates vary widely across districts, schools, and roles, and Arkansas is no exception. Arkansas doesn't release enough data to dig in too far, but its "teacher" pension plan also includes school support workers, and it disaggregates retention rates specifically for those workers. In contrast to teachers, school support workers in Arkansas have much higher turnover rates. Here are their five-year survival rates:
Five-year survival rate for Arkansas school support workers, as of 2007: 28 percent
Five-year survival rate for Arkansas school support workers, as of 2017: 23 percent
To put a finer point on it, just 23 percent of Arkansas school support workers stay long enough to qualify for any pension at all. They're paying into the pension system, and their employer is contributing on their behalf, but they'll never get anything out of it. Again, the pension plan stayed the exact same throughout this time period, and it was the same pension plan for school support employees as it was for teachers.
Third, I also looked at the assumed retention rates used by the Arkansas Public Employees Retirement System (APERS). In benefit terms, the ATRS and APERS plans are extremely similar, except that APERS covers state and local government employees. For those workers, APERS assumes a five-year survival rate of 27 percent, and it hasn't changed this assumption in the last 10 years.
Now, none of this proves pension plans do or do not have an effect on retention. That would require a much more rigorous study than the superficial look I've presented here. It's possible that pension plans do exert some retention effects on certain groups of teachers, but that those effects are being swamped by other factors like salary or working conditions. But neither of the Arkansas plans assume that workers change their behavior around the vesting period in order to qualify for a pension. And Arkansas' diverging trends do suggest that pension plans are not enough to protect against fluctuations in retention rates over time, or against some groups of workers having much higher or lower retention rates even in the same pension plan.
*Note: Throughout this post, I use the state's turnover estimates for females. The rates for men are even higher.
The following piece originally appeared on The 74.
For nine days, West Virginia teachers went out on strike over concerns about salaries and health care benefits.
Although 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.