Snapshot of Teacher Retirement
Arizona State Retirement System
Average pension value (2018): $19,771
Median pension value (2018): $20,604
Vesting Period: None
Teacher Contribution Rate (2018): 11.94%
Employer Contribution Rate (2018): 11.94%
Participation in Social Security: Yes
How Do Teacher Pensions Work in Arizona?
In Arizona, teachers are a part of the Arizona State Retirement System, which includes not only teachers but all state employees. Indeed, the system was established in 1953 and teachers voted to join two years later.
The basic structure of Arizona’s teacher defined benefit (DB) pension is similar to that of other states. Unlike other retirement funds, a teacher’s contributions and those made on his or her behalf by the state or school district do not determine the value of the 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 his or her years of experience and final salary.
Finally, most states, including Arizona, have adopted multiple benefit tiers for teachers depending on when they were hired. Arizona’s benefit tiers can be found here.
How Are Teacher Pensions Calculated in Arizona?
Pension wealth is derived from a formula. The figure below illustrates how a teacher pension is calculated in Arizona. It is important to note, however, that the state assesses an educator’s final salary based on their average salary from the past 5 consecutive 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 55 percent of their final salary.
Generally, states use a consistent multiplier, for example 2 percent, for all teachers. However, Arizona is unique and applies four different multipliers depending on the teacher's years of service. This approach provides slightly more generous benefits to those teachers who serve the longest.
Calculating Teacher Pension Wealth in Arizona
|Multiplier||X||Avg. salary over consecutive 60 months||X||Years of service|
Multiplier differs by years of service
Less than 20
20 - 24.99
25 - 29.99
More than 30
Who Qualifies for a Teacher Pension in Arizona?
There are a few other features of Arizona’s teacher pension plan that make it unique. First, unlike most states, Arizona does not have a vesting period. This means that educators qualify for a pension regardless of how long they serve. That pension may not be worth all that much, and educators can’t begin to collect it until they hit the state’s retirement ages, but immediate vesting does at least ensure all educators immediately qualify for a pension when they reach retirement age.
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.
The state sets specific windows when teachers can retire with benefits based on age and years of experience. For new teachers starting out in Arizona, they can retire with their full benefits when they reach the following conditions:
- Age 65;
- Age 62 with at least 10 years of experience
- Age 60 with at least 25 years of experience; and,
- Age 55 with at least 30 years of experience.
Additionally, Arizona allows early retirement at age 50 with at least 5 years of experience, but teachers taking that option have their benefits reduced based on their years of experience and how early they are retiring.
"How Much Does Arizona's Teacher Pension Plan Cost?
As they work, teachers and their employers must contribute into the plan. Those contribution rates are set by the state legislature and can change year-to-year. In 2018, both the state and the employee contributed 11.94 percent of their salary to the pension fund. In total, 23.88 percent of teacher salary was spent on Arizon's teacher pension fund. However, not all of that investment goes toward benefits. While the full 11.94 percent of salary contirbuted by individual teachers is for benefits, the state contributes only 2.97 percent. The remaining 8.97 percent state contribution is to pay down the pension fund's debt.
Finally, in Arizona, as with most states, teacher pensions are not portable. This means that if a teacher leaves the ASRS system, he or she can’t take her benefits with her, even if she continues working in the teaching profession. As a result, someone who leaves teaching or who moves across state lines might have two pensions, but the sum of those two pensions is likely to be worth less than if she remained in one system for her entire career. 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, Arizona’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 Arizona should think carefully about their career plans and how they interact with the state's retirement plan.