Teacher Pension Problems Drain States, School Employees

Teacher Pension Problems Drain States, School Employees
December 31, 2012

Ashley Bateman

Ashley Bateman (bateman.ae@googlemail.com) writes from Alexandria, Virginia. (read full bio)
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States don’t have $390 billion they’ve promised teachers in future pensions, according to a new report by the National Council on Teacher Quality. This means taxpayers will have to backfill the difference while receiving no new services in return.

For the report, No One Benefits, NCTQ researchers analyzed teacher pension systems across the United States, ferreting out technical details of pensions that make them expensive and unfair. 

“Although policymakers can see the numbers and that they are worrisome, there’s always a 30- or 40-year plan toward solvency,” said Sandi Jacobs, NCTQ’s state policy director. Although big financial institutions make similar projections, they do so on different, more realistic assumptions, she said. The rates of return most state plans assume haven’t materialized in “many, many years,” she notes. “We have to be realistic.”

Numbers Worse Than Reported
According to the report, school employee pensions are “severely” underfunded, meaning states have not banked the money necessary to pay when pensions come due. Only 10 states have well-funded systems by industry standards, the report notes.

“[U.S. public pensions] have an accounting standard that is much looser than public employee pensions in other countries. If you do better accounting, the numbers are very bad,” said Andrew Biggs, a resident scholar at the American Enterprise Institute.

Teacher pensions are in trouble like other public pensions, Biggs said: lawmakers often trade between pensions and other forms of compensation for public employees. Higher pension contributions might mean lower wages or fewer raises for teachers, he said.

Teachers Feel Trapped
A major flaw in most state systems, the report says, is basing retirement eligibility on years worked rather than age, allowing teachers to retire with full lifetime benefits as young as their early 50s.

“A mid-career person, sick of being a teacher, would be out of their minds to quit, because they’re just hitting the sweet spot,” Biggs said. “Defined pension benefits aren’t as meaningful to young, mobile employees.”

Such systems push even teachers who love teaching to quit in their 50s because their contribution amounts will soon outweigh their overall benefits, Biggs said. He recommends moving to an age-based system where workers are eligible for benefits only in old age.

The report found 10 states requiring teachers to wait until typical retirement ages to collect benefits saved an average of $450,000 per teacher.

Time-based pensions tied to one employer also leave teachers feeling trapped, said Rebecca Friedrichs, a kindergarten teacher in Orange County, California.

“It’s not affordable to leave, is common talk amongst teachers,” she said. “In most jobs, you get better and better and better at your job, and then you can find a new job and make more money. Not in teaching.”

Most systems give few benefits to younger teachers, then spike benefits 10 to 20 years in. This shortchanges excellent younger teachers and gives mediocre, older teachers reason to stay, Biggs said.

Implications for Recruitment, Quality
Friedrichs said some teachers feel “stuck” in their schools and current pensions make unhappy and ineffective teachers unwilling to move because that would trash years of contributions.

“Public sector pensions have very important implications for attracting and retaining employees,” Biggs said. “It’s not due to funding as much as to the way you accumulate benefits over your lifetime.”

Underfunded pensions shouldn’t concern teachers because states are legally required to pay as promised, Biggs said. But the problem should concern taxpayers, who are funding an antiquated, unrealistic, and expensive system that distresses good teachers and keeps more poor and mediocre ones in classrooms.

Friedrichs, who commutes an hour to work, said the only thing keeping her at her current school is the loss of benefits and pay if she transfers.

“I’m in a very bad school district right now,” Friedrichs said. “It’s very hard to work there. I’ve been miserable for about eight years. I could be hired easily in a private school, but I couldn’t afford it because my retirement would stop. If I had a 401(k), I could move and just keep paying into it.”

Calls for Systemic Reform
The report recommends making retirement plans portable so teachers retain the benefits they have earned no matter where they choose to work.

“The workforce has become much more mobile than it was 20 or 30 years ago,” Jacobs said. “You might move from public to private, from one district to another, … across a state line—there are a lot of reasons why portability is so important.”

Since 2008, 40 states have increased employer and teacher pension contribution requirements. Many states have also recently adjusted teacher pensions by making teachers wait 10 years to vest in their plans, reducing benefits, or raising the retirement age. However, the report states, “These small adjustments are no replacement for systemic reform, and they have a real impact on teachers’ wallets.”

The report recommends states realistically assess and begin fully funding teacher retirements, instituting safeguards to prevent future pension raids. It also recommends giving teachers equal benefits, rather than giving nearly none to teachers early on and spiking benefits later.

“The financial exigencies are just become increasingly impossible to ignore, so hopefully we’ve given the states some recommendations they can move forward on,” Jacobs said. “Time will tell whether they’re listening.”

 

Learn more:
“No One Benefits: How Teacher Pension Systems Are Failing Both Teachers and Taxpayers,” National Council on Teacher Quality, December 2012: http://news.heartland.org/policy-documents/no-one-benefits-how-teacher-pension-systems-are-failing-both-teachers-and-taxpayers

Image by Dan Moyle.

Ashley Bateman

Ashley Bateman (bateman.ae@googlemail.com) writes from Alexandria, Virginia. (read full bio)