Hidden Penalties: How States Shortchange Early-Career Teachers
Half of today’s new teachers will not stay in a single pension system long enough to meet even the minimum service requirements to qualify for a pension when they retire. Just one in five will earn a full pension. Instead, the majority of teachers, many of whom are just beginning to save for retirement, face thousands of dollars in lost compensation in the form of forfeited employer contributions.
Retirement savings penalties can arise anytime an employee fails to qualify for retirement benefits worth less than their own contributions, the contributions of their employer, and the interest accrued on those contributions. This brief focuses on the retirement losses of one particular group—new teachers who don’t teach long enough in one place to qualify for even a minimum pension. These teachers may leave to teach somewhere else by choice or life circumstances, take a break from teaching for personal reasons and not return, or may choose to leave teaching altogether for a different profession.
This group is important in its own right—it constitutes about half of all new teachers, and teachers are our largest class of college-educated workers in the United States. But these teachers are not the only ones affected by poorly structured retirement plans. Current pension plans also don’t work well for other groups of teachers. Teacher pension plans often provide only modest benefits to those who stay for 10, 15, or even 20 years. In fact, the popular perception that public-sector retirement plans are better than those offered in the private sector applies only to the small fraction of teachers who remain in one state or municipal pension plan for their entire career. And, contrary to conventional wisdom, shorter-term teachers can actually be worse off than their peers in the private sector, because teachers are often asked to wait longer to qualify for a share of their employer’s retirement contributions than is allowed in the private sector under federal law.
It's commonly accepted that public-sector workers such as teachers trade lower salaries for higher job security and more generous benefits. But that trade only works well for teachers who actually stick around until retirement. Most teachers get the worst of both worlds—they earn lower salaries while they work and they forfeit retirement savings when they leave. The sheer size of those penalties and their all-or-nothing nature places many teachers on an insecure retirement path. States could improve their plans by reducing their vesting periods to more closely track those in the private sector. Or they could shift to giving teachers a little bit more retirement savings (and thus a little bit more inducement to stay) for each year of service. Until states make such changes, they will continue to impose large retirement savings penalties on significant portions of their teaching workforce.