Snapshot of Teacher Retirement
Employees' Retirement System of Rhode Island
Average pension value (2018): $25,103
Median pension value (2018): $27,000
Vesting Period: 5 Years
Teacher Contribution Rate (2018): 4.18%
Employer Contribution Rate (2018): 26.18%
Participation in Social Security: Varies by District
How Do Teacher Pensions Work in Rhode Island?
In Rhode Island, teachers are a part of the Employees' Retirement System of Rhode Island, which includes not only teachers but all state employees. The system was established in 1936.
Since 2012, teachers are enrolled in a hybrid retirement plan that combines elements of both a traditional defined benefit (DB) pension plan and a defined contribution (DC) plan. The DC plan functions like a traditional 401k-style plan in the private sector: the employee contributes a set percentage of their salary and the employer matches a portion each year.
The basic structure of the DB portion of Rhode Island's hybrid retirement plan 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 their years of experience and final salary.
How Does Rhode Island's Hybrid Plan Work?
How much a teacher and their employer contributes to the DC component of Rhode Island's Hybrid plan depends on whether or not the teacher works in a district that elected to participate in Social Security. Teachers who participate in Social Security contirbute 5 percent of their salary to the DC portion of the plan annually. The employer additionally contributes between 1 and 1.5 percent based on a teacher's years of experience. Those teachers not participating in Social Security contribute 7 percent of their salary each year, while their employer contributes between 3 and 3.5 percent depending on the teacher's years of experience.
In 2019 teachers contributed 3.75 percent of their salary to the DB portion of the hybrid plan while their employers contributed 25.72 percent. While all of the teacher's contributions go toward benefits, only 4 percent of their employers contributions are for benefits. The remaining 21.72 percent goes to pay down the plan's unfunded liabilities.
How Is The DB Portion of Rhode Island's Hybrid Plan Calculated?
Pension wealth is derived from a formula. The figure below illustrates how a teacher pension is calculated in Rhode Island. It is important to note, however, that the state assesses an educator’s final salary based on the average of their 5 highest years of salary. 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 25 percent of their final salary. But keep in mind the DB plan is only a portion of a teacher's retirement benefit under the state's hybrid plan.
Calculating Teacher Pension Wealth in Rhode Island
|1% Multiplier||X||Avg. salary for five highest-paying years||X||Years of service|
Who Qualifies for a Benefit Under the Hybrid Plan?
Like most states, teachers need to serve a number of years before qualifying for a pension. Rhode Island has a 5 year vesting period for the DB portion of the hybrid plan. But even if a teacher vests in the DB portion of the plan, they cannot take the benefit with them if they leave the profession or the state. These benefits are not portable and cannot be combined with a retirement benefit plan from another state.
The state sets specific windows when teachers can retire with their DB benefits based on age and years of experience. For new teachers starting out in Rhode Island, they can retire with their full benefits when they reach their "full retirement age" for Social Security benefits, which is age 67 for those born after 1959. In addition, teachers can also retire with their full benefits when they reach 65 years of age and have accrued at least 30 years of service, reach 64 years of age and have accrued 31 years of service, reach 63 years of age and have accrued 32 years of service, or reach 62 years of age and have accrued 33 years of service.
The DC component of the plan operates differently. First, teachers vest immediately for their own contributions. They vest for the employer contributions made on their behalf after 3 years. And unlike the DB element of the hybrid plan, these benefits are portable. A teacher may always bring the contributions they made to the plan with them to a new state or profession and combine them with a similar retirement savings plan. And after 3 years of service, they can take all of ther DC retirement wealth.
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.