Snapshot of Teacher Retirement
Alabama Teachers' Retirement System
Average pension value (2018): $22,335
Median pension value (2018): $22,512
Vesting Period: 10 Years
Teacher Contribution Rate (2018): 7.5%
Employer Contribution Rate (2018): 12.08%
Participation in Social Security: Yes
How Do Teacher Pensions Work in Alabama?
In Alabama, teachers are a part of the Teachers' Retirement System of Alabama. The system was established in 1939.
The basic structure of Alabama's teacher defined benefit (DB) pension is similar to that of other states. Unlike other types of retirement plans, a teacher’s contributions and those made on their behalf by their employer do not determine the value of their pension at retirement. Although those contributions are invested in the market, and often managed by private equity and hedge funds, a teacher’s pension wealth is not derived from the returns on those investments. Instead, it is determined by a formula based on their years of experience and final salary.
Finally, most states, including Alabama, have adopted multiple benefit tiers for teachers depending on when they were hired. Alabama's member handbook can be found here.
How Are Teacher Pensions Calculated in Alabama?
Pension wealth is derived from a formula. The figure below illustrates how a teacher pension is calculated in Alabama for teachers hired after January 1, 2013. It is important to note, however, that the state assesses an educator’s final salary based on an average of their highest five years of salary from the past 10 years. For example, a teacher who works for 25 years with a final average salary of $70,000 would be eligible for an annual pension benefit worth 41.25 percent of their average final salary.
Calculating Teacher Pension Wealth in Alabama
|1.65% Multiplier||X||Avg. salary over highest 5 years from last 10||X||Years of service|
For Tier II teachers in Alabama, their retirement benefits are capped at 80 percent of their final average salary.
Who Qualifies for a Teacher Pension in Alabama?
Like most states, teachers need to serve a number of years before qualifying for a pension. Alabama has a 10 year vesting period. While educators qualify for a pension after 10 years of service, however, the pension may still not be worth all that much. Moreover, educators can’t begin to collect it until they hit the state’s retirement age.
The state sets specific windows when teachers can retire with benefits based on age and years of experience. Tier II teachers starting out in Alabama can retire with their full benefits when they reach 62 years of age and have accrued at least 10 years of service.
How Much Does Alabama's Teacher Pension Plan Cost?
As they work, teachers and their employers must contribute into the pension plan. Those contribution rates are set by the state legislature and can change year-to-year. In 2018, Tier I members contributed 7.5 percent, Tier II teachers contributed 6 percent of their salary, and employers contributed 12.08 percent. However, not all of that investment goes toward benefits. While the full teacher contribution goes toward benefits, employers contributed only 2.73 percent of salary toward actual worker benefits. The remaining 9.35 percent employer contribution is to pay down the pension fund's unfunded liabilities.
Finally, in Alabama, as with most states, teacher pensions are not portable. This means that if a teacher leaves the TRS system, they can’t take their benefits with them, even if they continue working in the teaching profession. As a result, someone who leaves teaching or who moves across state lines may go on to qualify for two pensions, but the sum of those two pensions is likely to be worth less than if they remained in one system for their entire career. If Alabama teachers decide to withdraw from the plan, they can take their own contributions with them, with a small amount of interest depending on their years of service, but they do not receive any share of the employer contribution. In other words, the lack of benefit portability will hurt the long-term retirement savings of any educator who leaves teaching altogether or who crosses state lines to work in another state.
As with most state pension funds, Alabama's teacher retirement system provides the greatest benefits to teachers who stay the longest, while leaving everyone else with inadequate benefits. With that in mind, new and current teachers in Alabama should think carefully about their career plans and how those goals interact with the state's retirement plan.
Glossary of Financial Terms
Vesting period: The number of years a teacher must teach before becoming eligible to receive a pension. Although the length of vesting periods vary by state, 5 years is typical. In every state, a teacher who leaves prior to vesting is eligible to withdraw his or her own contributions, sometimes with interest, but few states allow those employees to collect any portion of the employer contributions made on their behalf.
Employee contribution: The percent of a teacher’s salary that he or she pays annually to the pension fund.
Employer contribution: The percent of a teacher’s salary that the state, school district, or a combination of the two pays annually to the pension fund.
Normal cost: The annual cost of retirement benefits as a percentage of teacher salary. This excludes any debt cost.
Amortization cost: The annual cost of a pension fund’s contribution toward any unfunded liabilities. This can also be thought of as the debt cost of the pension fund.