Doing the Math on Teacher Pensions: How to Protect Teachers and Taxpayers

Kathryn M. Doherty, Sandi Jacobs and Martin F. Lueken
Publication Date: 
January 2015
In this report, the National Council on Teacher Quality (NCTQ) issues a grade for each state's teacher pension system. Based on data collected since 2008, NCTQ grades each state’s teacher retirement plan on three components:
  • Plan funding and sustainability. Collectively, state pension plans face a $1.4 trillion shortfall, with teacher pensions alone accounting for $500 billion in unfunded liabilities. For every dollar contributed to state pension plans, an average of $.70 goes toward paying down the pension debt (rather than benefits for current teachers). NCTQ urges states to more responsibly manage their pension debt.    
  • Flexibility and portability. Teachers who leave before vesting do not qualify for benefits, and over half of teachers won't vest into their state's pension system. Non-vested teachers receive a refund on their contributions and sometimes interest, but rarely receive any portion of their employer contributions. NCTQ recommends a vesting period of three years or less and that plans allow non-vested teachers to keep a portion of their employer's contributions.
  • Neutrality. Pensions benefits are heavily back-loaded where teachers accrue substantial benefits in their later career years. NCTQ recommends that states design plans that allow teachers to accrue benefits uniformly for each year of work, treating early and later career teachers equitably. 
Amongst the high performers, NCTQ graded Alaska and South Dakota with top grades:
  • Alaska was the only state to earn an “A” grade. Alaska provides teachers with a fully portable, defined contribution retirement plan. The plan allows teachers to vest immediately on their own contributions. Vesting on employer contributions is graduated (25 percent after two years, 50 percent after three years, and 75 percent after four), with full vesting after five years.
  • South Dakota received a “B+” grade for its low vesting requirement (three years) and portability. Teachers who leave before vesting can withdraw their contributions, interest, and a 50 percent match on employer contributions
On the other hand, amongst the low performers: 
  • Mississippi received a failing grade. Poor-funding, high vesting requirements (eight years), and high employee and employer contributions rates make Mississippi a poor system for teachers and taxpayers. 
Overall, state teacher retirement plans received an average grade of a “C-.”