Snapshot of Teacher Retirement
Colorado Public Employees Retirement Association
Average pension value (2018): $40,785
Median pension value (2018): $39,247
Vesting Period: 5 Years
Teacher Contribution Rate (2018): 8.38%
Employer Contribution Rate (2018): 23.59%
Participation in Social Security: No
How Do Teacher Pensions Work in Colorado?
In Colorado, teachers are a part of the Colorado Public Employees' Retirement Association (PERA), which includes not only teachers but all public employees. The system was established in 1931 and is the largest public retirement system in the state.
The basic structure of Colorado’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 their 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 Colorado, have adopted multiple benefit tiers for teachers depending on when they were hired. Colorado's benefit tiers can be found here.
How Are Teacher Pensions Calculated in Colorado?
Pension wealth is derived from a formula. The figure below illustrates how a teacher pension is calculated in Colorado. It is important to note, however, that the state assesses an educator’s final salary based on the highest average salary from 4, 12-month periods. 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 62.5 percent of their final salary.
Calculating Teacher Pension Wealth in Colorado
|2.5% Multiplier||X||Highest avg. salary of four 12-month periods||X||Years of service|
Who Qualifies for a Teacher Pension in Colorado?
Like most states, teachers need to serve a number of years before qualifying for a pension. Colorado has a 5 year vesting period. While educators qualify for a pension after 5 years of service, the pension may 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. For new teachers starting out in Colorado, they can retire with their full benefits when their age and years of service combine to 94, with a minimum age of 64.
Additionally, Colorado allows early retirement at age 55 once they have accrued at least 25 years of service, or at age 60 with at least 5 years of service. However, teachers taking that option have their benefits reduced based on their years of experience and how early they are retiring.
How Much Does Colorado'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, teachers contirbuted 8.38 percent of their salary to the pension fund, while the state contributed 23.59 percent. In total, 31.97 percent of teacher salary was spent on Colorado's teacher pension fund. However, not all of that investment goes toward benefits. While the full 8.38 percent of salary contirbuted by individual teachers is for benefits, the state contributes only 3.62 percent. The remaining 19.97 percent state contribution is to pay down the pension fund's debt.
Finally, in Colorado, as with most states, teacher pensions are not portable. This means that if a teacher leaves the PERA 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 might have two pensions, but the sum of those two pensions is likely to be worth less than if they 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, Colorado’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 Colorado should think carefully about their career plans and how they 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.