Negative Returns: How State Pensions Shortchange Teachers

Chad Aldeman and Richard W. Johnson
Publication Date: 
September 2015

Teachers count on their pensions for a stable, secure retirement. They contribute to a plan during their time in the classroom, the state takes care of the investments, and the end result is a generous, guaranteed stream of income throughout their retirement years. 

Or, at least, that’s the story most often told about pensions. What’s left unsaid is that most teachers either won’t qualify for a pension at all, or will qualify for one so meager that it will be worth less than their own contributions. 

State pension plans provide little retirement income security to most teachers with shorter tenures, even many who spend as long as 20 or 25 years teaching in one state. Virtually every plan requires participants to contribute toward the cost of their retirement benefits, and employees must work many years before their future benefits exceed the value of their required contributions. Those who leave before reaching that milestone do not receive any employer-financed retirement benefits, despite their often-lengthy careers. 

This brief calculates, for each state, how long teachers hired at age 25 must remain teaching in the same state to earn any employer-financed pension benefits from their state’s pension plan. The analysis identifies the break-even point in each state plan, the time when teachers could leave public employment with promised future pension payments worth more than their own contributions. This brief identifies two problems that systematically disadvantage teachers:

  • First, in the median state, teachers must serve at least 25 years to receive a pension worth more than their own contributions. Teachers with shorter careers get no school-financed retirement benefit despite their many years of service. They may be better off taking back their own contributions when they quit rather than waiting to collect a pension.
  • Second, the authors estimate that more than three-quarters of new teachers will earn less in pension benefits than they contributed to the plan. Instead of benefiting from their pension plans, most teachers are net contributors. 

Recent pension reforms, focused mainly on cutting costs, generally make this situation worse and force new teachers to work even longer before they benefit from their pension plans. But instead of simply trimming existing teacher pensions, alternative benefit designs like 401(k)-style defined contributions plans or cash balance plans would enable all public school teachers to accumulate savings toward a secure retirement, including those with shorter careers. Such reforms would distribute benefits more equally and attract talented young teachers, for whom a secure retirement is now more often a mirage than a reality.