Snapshot of Teacher Retirement
Tennessee Consolidated Retirement System
Teacher Contribution Rate-DB Plan: 5%
Employer Contribution Rate-DB Plans (2018): 13.91%
Teacher Contribution Rate-DC Plan: 2%
Employer Contribution Rate-DC Plan: 5%
Vesting Period-DB Plan: 5 years
Participation in Social Security: Yes
How Does Teacher Retirement Work in Tennessee?
In Tennessee, teachers are a part of the Tennessee Consolidated Retirement System, which includes not only teachers but all state employees. The system was established in 1972 with the consolidation of seven separate retirement systems for state employees, including public school teachers.
Since July 2014, new teachers are enrolled into the state's Hybrid Retirement Plan for State Employees and Teachers, which combines elements of a pension plan and a defined contribution (DC) plan. Although it only makes up part of the hybrid plan, the basic structure of Tennessee's teacher defined benefit (DB) pension is similar to that of other states. Unlike other retirement funds, a teacher’s contributions to the DB plan 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.
The details of the state's legacy pension plan, which serves teachers hired before July 2014 can be found here.
How Does Tennessee's Hybrid Plan Work?
Teachers hired after July 2014 are automatically enrolled in Tennessee's Hybrid retirement plan instead of the statewide pension system. Participating teachers contribute 5 percent of their salary annually to the pension part of the Hybrid plan, while their employer contributes 4 percent. Teachers contribute 2 percent of their salary to the DC part of the plan yearly, while their employer contributes 5 percent. In total, teachers contribute 7 percent of their salary each year to their retirement, and their employer contributes 9 percent.
Under the Hybrid plan, teachers vest for the DB portion after 5 years of service. This means that after completing 5 years, a teacher is eligible for both her own and their employer's retirement contributions. Teachers vest immediately in the DC component. If a teacher leaves the classroom or moves from Tennessee after 3 years, for example, they will be able to take the entire DC portion of their retirement with them, but they will only be eligible for their own contributions to the DB part of the plan. They will have to forfeit their employer's contributions to the DB component since they did not vest in the fund.
How Is the DB Portion of Tennessee's Hybrid Plan Calculated?
Pension wealth is derived from a formula. The figure below illustrates how a teacher pension is calculated in Tennessee. It is important to note, however, that the state assesses an educator’s final salary based on the average of thei 5 highest consecutive 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 under Tennessee's Hybrid plan.
Calculating Teacher Pension Wealth in Tennessee
|1% Multiplier||X||Avg. highest 5 consecutive years of salary||X||Years of service|
Who Qualifies for a The Pension Portion of Tennessee's Hybrid Plan?
Like most states, teachers need to serve a number of years before qualifying for a pension. Tennessee 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. New teachers starting out in Tennessee can retire with their full benefits when they reach 65 years of age and have accrued at least 5 years of service, or when their age and years of service combine to total at least 90.
Additionally, Tennessee allows early retirement for teachers at age 60 once they have accrued at least 5 years of service or when their age and years of service combine to total at least 80. However, teachers taking that option have their benefits reduced based on their years of experience and how early they are retiring.
How Much Does Tennessee's Teacher Pension System 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 contributed 4.2 percent of their salary to the pension fund, while the state contributed 13.91 percent. In total, 18.11 percent of teacher salary was spent on Tennessee's teacher pension fund. However, not all of that investment goes toward benefits. While the full 4.2 percent of salary contributed by individual teachers is for benefits, the state contributes only 7.17 percent. The remaining 6.74 percent state contribution is to pay down the pension fund's debt.
As with most state pension funds, Tennessee'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 Tennessee 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.