Pensions Under Pressure: Charter Innovation in Teacher Retirement Benefits

Michael Podgursky, Susan Aud Pendergrass, and Kevin Hesla
Publication Date: 
February 6, 2018

Teacher pension funds across the country are in trouble. They are hundreds of billions of dollars in debt. To make ends meet, many states have raised the vesting period and increased how much teachers have to contribute to their retirement. Despite these changes, state pension funds fail to provide all new teachers with sufficient retirement benefits. 

In some states, however, charter schools are permitted to opt-out of the state teacher pension fund and devise their own retirement benefit system. To explore how charters can use this flexibility to create different teacher retirement plans, economist and pension expert Michael Podgursky and national charter researchers Susan Aud Pendergrass and Kevin Hesla studied retirement plans at charter schools across five states: Arizona, California, Florida, Louisiana, and Michigan.

Podgursky, Pendergrass, and Hesla found that an increasing number of charters in these states, particularly those run by charter management organizations, opt out of state pension plans to offer their own benefit. However, the rate at which charters choose to participate in the teacher pension system varies considerably by state. Charters that elect to participate in the state pension fund report that the top reasons for their decision is if the pension fund helps to recruit and retain teachers.

In addition, increasing shares of charter schools are opting out of the pension system altogether. Instead, they often establish a defined-contribution plan (DC), such as a 401(k) or a 403(b), which provide a more valuable benefit to the majority of teachers. Additionally, these retirement plans are portable and can be taken with teachers if they move across state lines. Charters that provide this retirement benefit cite cost and a wider range of investment options for teachers as their top reasons to opt-out of the state teacher pension fund.