We expect a lot of teachers. We ask them to teach math, reading, and arithmetic, yes, but also to be “nation builders” and to instill civic virtues.
We also expect them to make incredibly complicated financial decisions about their retirement.
But wait, you might ask, aren’t most teachers covered by state-run pension plans that take care of retirement savings decisions? Yes, they are, but most teachers won’t remain in those pension plans their full career. And when they leave, they’ll be faced with a difficult decision about what to do with their retirement money.
About half of all teachers won’t vest into their pension plan at all; they won’t be eligible for any pension from the pension system. These teachers are eligible to withdraw their own contributions, sometimes with a small amount of interest, but only two states provide any employer contributions. These teachers need to decide whether they should keep their money in the pension plan, or whether they're better off withdrawing their money and rolling over their savings into an Individual Retirement Account (IRA).
That’s a tough decision, particularly if the teacher is simply taking time off to start a family or is thinking about returning at some point in the future. But it’s nowhere near as tough as the decision faced by teachers who are vested.
A vested teacher will qualify for a pension upon her retirement, but that may be many years away, and her future pension will be based on her salary today, unadjusted for inflation. What is her pension worth today, in real, inflation-adjusted dollars? That’s a much tougher calculation, and it depends on how fast you think inflation and investments will grow over time. Smart economists have different answers to these questions, so what’s a teacher to do?
According to a recent study on the behavior of Illinois teachers, most teachers take the conservative route of inaction. Looking across all departing, vested teachers, 73 percent opt to leave their money with the pension plan (in addition to the 62 percent of teachers who won’t vest in Illinois, that means roughly three-fourths of Illinois teachers will either fail to qualify or choose not to receive a pension). Those rates vary somewhat by type of teacher. Males are more likely than females to withdraw their money. Hispanic and, especially, black, teachers are more likely to withdraw than white teachers.
But are these teachers making the “right” financial decision? That depends, again, on their personal situation and how fast they might be able to grow their investments on their own.
In the Illinois study, economist and EdChoice’s Director of Fiscal Policy & Analysis Martin Lueken calculated, for every teacher, their current net pension wealth based on their age and years of experience. If teachers had an expected pension wealth above what they would have been able to withdraw and invest on their own, he considered them to have a “positive” net pension wealth. If not, he classified them as having a “negative” net pension wealth. Then, he adjusted their net pension wealth based on potential investment returns. The higher the investment return teachers could earn themselves, the less likely they were to have a positive net pension wealth (that is, the better they were at investing, the less valuable the pension amount became).
If teachers could take their own money and earn an investment of only 2 percent above inflation, just 14 percent of vested Illinois teachers would leave with a negative pension wealth. That's a very modest assumption, and most teachers would be better off leaving their money in that circumstance. But if teachers could do a little better with their investments and raise their investment return to 4 percent net (still not an outrageous return), then 73 percent of teachers would leave with negative pension wealth. They would be better off pulling their money than leaving it in the pension plan. (At 6 percent, a high investment return but not far from what the state itself thinks it can earn, 88 percent of teachers would be better off pulling their money.)
For each of these scenarios, Lueken’s calculations allow us to see how many teachers made “correct” or “incorrect” decisions*. Depending on the assumed investment return, somewhere between 32 and 64 percent of teachers were making incorrect decisions. The chart below illustrates where teachers would fall under the 4 percent assumption. In this moderate scenario, more than half of all departing teachers are making the wrong decision. About 32 percent of teachers with positive pension wealth cashed out but shouldn’t have, and 63 percent of teachers with negative pension wealth should have cashed out but didn’t.
Now, teachers are well-educated, intelligent people, but we’re putting them in an impossible situation. We’re asking them to predict whether they’ll return to teaching and to compare their pension wealth, in future dollars, versus how much it might be worth if they invested their money elsewhere. That’s super complicated stuff, and it’s something most teachers don’t have the time to contemplate.
In comparison, most workers in the private sector have much easier decisions. We may have to decide our own investments, but we’re given a limited list of options. Increasingly, private-sector employers are nudging workers into making good decisions. And, when we leave a job, our choices are simpler. We can either leave our money in the existing funds, or we can roll it over to IRAs. The questions for private-sector workers are really about choices and fees, and they’re much more straightforward than the decisions teachers face.
States, on the other hand, systematically force public school teachers to make extremely complex financial decisions. Saving for retirement is hard enough; we shouldn't force teachers into such complex decisions.
*"Correct" in this context is hypothetical, based purely from a financial standpoint, and it assumes teachers had full information about the value of their pensions. In real life, individual teachers don’t have perfect information and must weigh trade-offs from their own unique perspective. As with all of our work here at TeacherPensions.org, this post is illustrating public policy choices and is not intended as personal investment advice. Teachers should consult a qualified financial professional before making consequential financial decisions.
It’s no secret that we need to get more STEM teachers into our classrooms. These fields are high-growth and high-paying. But there’s a problem: we currently don’t have enough STEM teachers already in classrooms to get today’s students interested and prepared for these fields.
So how do we get more STEM teachers? One idea is to convince folks leaving a STEM job to start a second career in the classroom. 100Kin10 and Troops to Teachers are two among many organizations that recruit nontraditional candidates into schools.
But there’s a catch for these would-be teachers.
Career-changers, particularly in STEM fields, would most likely have to accept both a significant pay cut and lower retirement benefits.
To most people, the decrease in salary is probably obvious. But the lower retirement savings could come as a shock. This happens because these individuals will have two separate retirement saving plans. And, unfortunately, they will be unlikely to realize the full benefits of either.
Most likely someone who is switching careers from the private sector to become a teacher already has a 401k or similar retirement plan to which she and her employer have contributed. These plans are pre-tax and grow through regular contribution and returns on investment. However, to grow significant wealth these plan depend on regular contributions that can then grow through the life of a worker’s career.
For many, the pension plan they enroll in as a teacher won’t be enough to make-up for the lost years of contributing toward their 401k. This happens because teacher pensions take a long time to accrue wealth. On average, it takes a 35-year-old new teacher about 19 years for a teacher to build a pension that is worth as much as the amount of money they put into it through pre-tax paycheck contributions. It will take 13 years for a 40-year-old new teacher.
This carries serious consequences for a teacher who started teaching mid-career. She will need to teach a long time just to avoid taking a loss. To make matters worse, her 401k from her previous career will have grown only through interest while she was in the classroom. In all likelihood, a mid-career teacher will have far more money in her retirement if she had remained in her previous job, or if she had taught for her entire career.
With these facts in mind, changing careers to teach is a far more costly transition than previously thought. It’s clear that we need more STEM teachers in our schools. What’s not clear, is why those teachers who have years of professional experience in the field should have to take a significant pay cut and have their retirement benefits slashed in order to help our students. It’s unfair and makes it more difficult to recruit people with years of real-word experience to teach STEM.
States will need to develop innovative ways to ensure that highly valued mid-career STEM teachers do not face two barriers to the classroom: lower salaries and lower retirement savings. One way could be for states to forgo the pension system and instead contribute to the 401k of teachers who changed professions mid-career, or at least give teachers the option to do so. This way these teachers can continue to grow their 401k investments and avoid significant losses to their retirement funds.
Cassie Thompson is working toward balance. As a Head Start teacher in Cincinnati, Ohio, Cassie has strived to lead her 17 students, ages three to five years old, in both developmentally appropriate socio-emotional learning and academically rigorous kindergarten preparation. Says Cassie, “It isn’t supposed to be just finger-painting and running around – but finding a consensus on what pre-k should be, even within Head Start, is difficult.”
Early childhood education is challenging and often thankless work. A recent, comprehensive report out of the Center for the Study of Child Care Employment at the University of California, Berkeley detailed the abysmal salaries, work environments, and professional development opportunities afforded to early educators nationwide. My Bellwether colleague, Marnie Kaplan, has more on this here, and the Department of Education released similar findings this June.
But as state and local policymakers seek to expand pre-k opportunities and improve support for early childhood teachers, they must also ensure educators like Cassie are given a viable path to save for retirement. Perhaps unsurprisingly, many of the benefit inequities we see at the K-12 level trickle down to the early childhood sector as well. Here’s a quick breakdown:
The workforce is fragmented
Some pre-k teachers work in school districts, while others, like Cassie, are employed by community-based providers. This distinction alone means two early childhood teachers with identical qualifications could have dramatically different retirement benefits. Further, even those early childhood teachers who are eligible to enroll in a traditional teacher pension plan are still unlikely to benefit from the rewards promised – their tendency to be lower-paid and more mobile keeps them from reaping the back-end rewards of a state plan.
The workforce is underpaid
Early childhood educators are often compensated at much lower levels than K-12 school teachers—even when they work in publicly funded programs such as Head Start and state-funded pre-k. Pay is tightly linked to the ability to save for retirement. It isn’t that lower-paid workers are less cognizant of the need to save for their future, but rather, they simply have less money to save. We see this same scenario play out when analyzing women’s saving habits. While women are more likely to participate in retirement plans and contribute higher amounts, the average woman’s retirement account balance is half that of the average man’s. This isn’t because women are bad savers – in fact, they’re better – men just make more money and thus have more money left over to save.
In addition to differences in salary, lack of access to pensions and other retirement benefits available to K-12 teachers exacerbates salary inequities for early childhood workers. Although a growing number of policymakers, funders, and early childhood advocates recognize the need to improve the compensation of early childhood workers, retirement security issues are rarely included in these conversations.
This is unfortunate, because most early childhood workers lack retirement savings options altogether or have the option to join only meager, poorly structured 401(k) plans. Lack of access to employer-provided retirement plans is also a major area of inequity between preschool teachers working in public schools, who are enrolled in public pension plans, and those working in community-based organizations, who may not be enrolled in any retirement plan at all. The latter group is often made up of smaller providers, who face the same obstacles to providing benefits as other small companies. Here’s a bright spot: we’ve covered some of the state-based efforts to address this problem broadly; while there’s still work to be done on these, if enacted, pre-k teachers would be beneficiaries.
But what about Cassie? Her non-profit employer offers a 403(b) retirement plan, giving her the portability to take her savings with her as she pursues a new opportunity outside of the classroom. The downside? Cassie’s employer does not match employee contributions unless they stay for several years – though Cassie was with her employer for two years, she won’t receive any match on her own contributions.
If Cassie is any example, increasing pre-k salaries is only the beginning. In order to enhance the status of the profession and build a more stable corps of educators who can seamlessly transition across sectors and locations, the early childhood sector needs to expand its reform efforts to include retirement offerings, too.
Pension reform isn’t black and white. Although stakeholders often frame the debate as generous pensions versus stingy 401(k) plans, in reality the options are far more complex. As states consider how to reform their public sector pension plans, it’s important to understand the grey area between the two extremes.
In reality, there’s a wide spectrum of retirement plan options that could meet the needs of workers and employers. The continuum below, originally created by the National Association of State Retirement Administrators (NASRA), presents retirement plan types by employee and employer risk. We took NASRA’s spectrum chart and overlaid images representing which type of plan teachers are given in each state.
Over time, states have been shifting their public-sector pension plans from the far left-hand side, where the state took all the risk, closer to the center of the continuum, where the risk is spread more evenly between the employee and the employer. No state has put all of the burden of saving for retirement on workers alone. Plans that fall in the middle of the spectrum allow workers to move between professions with ease, while also giving employers greater predictability over future retirement costs. The shift toward the middle has been a good thing for public sector workers and for states. However, it isn’t happening at the same rate for all types of public employees.
When states are placed on the continuum based on their teacher plan type, it’s evident that a majority of states still enroll teachers in a traditional defined benefit pension plan. In eight states, those circled in blue, other groups of public employees are given more portable retirement plans, but teachers aren't. Teachers in states like Texas or California are enrolled in back-loaded defined benefit pension plans, while public-sector employees in those states have access to more portable defined contribution (DC) plans or a hybrid plan.
This situation is not a good deal for teachers. In fact, teachers have the least portable, most back-loaded retirement plans of any group of public-sector workers. This means that, when compared to their peers in other public-sector jobs, teachers have to work more years to earn decent retirement benefits. As Chad Aldeman and Richard Johnson point out, about three-quarters of teachers won’t ever reach the point in their teaching career where their promised future pension is worth more than what they themselves contributed. These teachers would be better off in more portable retirement plans.
There is good news, however, which is that the very long-term trend points in a positive direction. In the states circled in purple, new teachers are now receiving a DC or hybrid plan. This shift is a step in the right direction, but it will take time to show meaningful effects. Focusing on new teachers alone doesn't take away any benefits from anyone who might be counting on them, and it avoids political and legal hurdles that would be required to change benefits for existing workers. Still, the change will take time, and it won't address long-standing funding issues.
We’re in the midst of a slow shift away from back-loaded teacher pension plans. It may take a while, but there’s hope that state policymakers are recognizing there are better options that would provide all teachers sustainable and secure retirement benefits.Taxonomy:
Donald Trump has promised to make America great again. One thing he says he won’t look to change? Social Security. While maintaining the Social Security status quo might seem at the very least unobtrusive, it neglects an opportunity to extend coverage to the over 1 million teachers and 6.5 million government workers whose jobs go uncovered.
On February 29, Trump told Georgia rally attendees, “we’re going to save your Social Security without making any cuts. Mark my words.” He made similar remarks at an April rally in Wisconsin — both states, interestingly enough, extend social security coverage to only some of their teachers — and spoke favorably (though without specific recommendations) about preserving the program in a statement to AARP. Though no official stance on the topic appears on his website, and recent adviser statements seem to hedge toward cuts, let’s assume Social Security under Trump remains as is. He’s missing — perhaps not for the first time — an opportunity for real greatness.
While existing state pension plans aren't offering all workers adequate retirement benefits, Social Security at least offers them a solid floor of benefits. Expanding Social Security would help millions of uncovered workers, including all teachers in California, Illinois, and Ohio (where Trump will be accepting his party’s nomination tonight). Further, universal Social Security coverage would actually reduce the program’s existing deficit by 10% — yes, reduce — by more evenly distributing the program’s legacy costs. While Social Security isn’t designed to take the place of a stand-alone retirement benefit, it would provide all teachers with a much deserved and too often missed baseline of secure, nationally portable retirement benefits.
Neither candidate has broached the idea of universal coverage, though Hillary Clinton has proposed its expansion by increasing benefits for high-need groups, including widows and caretakers. Trump has yet to commit to any one approach – only promising not to make cuts. But to this point neither Clinton nor Trump has taken any steps towards addressing the benefit coverage gap that impacts millions of educators, many of whom will ostensibly head to the polls in November.Taxonomy:
Millennials are an easy target, and it’s easy to assume shifts in worker turnover are the result of this generation’s restlessness. But this is a misconception, and once we examine tenure data by age group and generation it reveals that millennials are merely following a broader downward trend in job tenure. Over the long term, millennials are following similar patterns as the generations that came before them.
First, as with any good myth, there's a kernel of truth. Data from the Bureau of Labor Statistics shows that the median time workers have been with their current employer is 4.6 years, up slightly from ten years ago. This data seems to show that, contrary to popular perception, workers are actually staying in their jobs longer than they were in previous years. The New Yorker’s Mark Gimein recently commented on the increase: “our collective nostalgia misrepresents historical job security so completely that it gets it close to backward.”
But wait, the averages here are misleading us from some bigger, underlying trends. We shouldn't be comparing today's average with yesterday's; we should be looking at how tenure changed for groups of workers at various stages of their careers.
We know that older workers tend to have longer tenures with their current employers than younger workers do. This has been true across generations, so what’s critical is looking at how today’s older workers compare to older workers in the past and how today’s younger workers compare to younger workers in the past. Once we take a closer look and sort the data properly, the data confirms the popular perception: job tenure is indeed declining across all age groups. Rather than being an entirely new phenomenon, the mobility of the millennial generation is best seen as merely one part of a greater downward trend.
To show this, the Atlanta Fed disaggregated the job tenure data and organized it by age and birth cohort instead of calendar year. Their graph, reproduced below, tells this more accurate story.
When the first group of baby boomers were in their thirties, they had, on average, been with the same employer for about six years. By the time boomers born ten years later reached their thirties, however, they had been with their current employer an average of just four years (see the first two dots on the purple line in the graph). By comparing two groups of workers as they hit the same career milestones, we can see an apples-to-apples comparison of how tenure changes over time.
As the graph shows, the downward trend continued with millennials. When baby boomers were in their 20s, the median boomer had four years of experience with their current employer. Today, the median millennial in his or her 20s has been in their current job for only a year, following a broader societal trend that spans across ages and generations.
It may seem counterintuitive that the median job tenure in all subgroups is declining while the aggregate median is slightly increasing. But that may simply be an artifact in differences in the size of each generation, sometimes referred to as Simpson’s paradox. Today, the baby boom generation is a large force in the labor market, and their size may be distorting the overall trends.
By looking at each generation over time, it’s clear the mobility trend is real, and it’s not a new phenomenon. It has implications in many areas, including how we think about job training, health care, and retirement benefits, not to mention broader societal effects. In order to propose solutions to those problems, however, we must first debunk existing myths and diagnose the problems accurately.Taxonomy: