Chad Aldeman | Pension360

All Teachers Deserve Adequate Retirement Benefits. It’s Harder Than You Think To Get Them

Chad Aldeman is an associate partner at Bellwether Education Partners and a former policy advisor at the U.S. Department of Education. This post was originally published on TeacherPensions.org.

How many teachers should be eligible for adequate retirement benefits?

My answer is all of them: For every year they work, teachers should accumulate benefits toward a secure retirement.

A reasonable person might say only those who stay for at least three or five years. That would require teachers to show some amount of commitment to the profession, and it would reward teachers for getting through the most challenging early years.

But that’s not the way current teacher retirement systems are designed. Most states require teachers to stay 20, 25, or even 30 years before they qualify for adequate retirement benefits. (The Urban Institute’s Rich Johnson and I calculated these “break-even” points across the country. Find info on your particular state here.)

In other words, today’s teacher pension systems only provide adequate benefits to teachers with extreme longevity. You don’t have to take my word for it. The California State Teachers’ Retirement System (CalSTRS) hired Nari Rhee and William B. Fornia to study whether California teachers were better off under the existing pension system or alternative retirement plans.

The chart below comes directly from their paper. It shows how benefits accumulate for newly hired, 25-year-old females under the current pension system (blue line), a defined contribution plan (red line), a defined contribution plan with no employer contributions (dotted blue line), and a cash balance plan (dotted green line). There are legitimate questions about whether these are perfectly fair comparisons—Rhee and Fornia ignore the large debts accumulated under traditional pension plans—but even in this analysis, it’s clear that the pension system is the most back-loaded benefit structure. Some teachers do better under this arrangement, but most don’t. Depending on the comparison, this group of teachers must stay two or three decades before the pension system offers a better deal.

Rhee and Fornia make a valid point that not all teachers enter the profession at age 25, and their paper also includes the graph below showing the actual distribution of California teachers by the age at which they began teaching. The most common entry ages are 23 and 24, just after candidates complete college (California requires most new teachers to go through a Master’s program before earning a license). The median entry age for current teachers is 29 (meaning half of all teachers enter at age 29 or younger), and the average is 33.

Rhee and Fornia’s point here is that people who begin teaching at older ages have shorter break-even points, and that teachers with shorter break-even points are more likely to benefit. This has a kernel of truth but obscures some key points.

First, it is true pension plans are better for workers who begin their careers at later ages. Pensions are based on a worker’s salary when she leaves the profession, and they don’t adjust for inflation during the interim. If a 35-year-old leaves teaching this year, she may qualify for a pension, but it will be based on her current salary right now. By the time she finally becomes eligible to begin drawing her pension, say in the year 2046, every $1 in pension wealth will be worth far less than it is today. Teachers who go straight from teaching into retirement don’t have this problem.

Consequently, it’s also true that teachers who begin their careers at later ages are comparatively better off than teachers who began at younger ages. They don’t have to wait as long, so the break-even points fall from 31 years for a 25-year-old entrant to just 7 years for a 45-year-old entrant.

But their argument starts to suffer when compared to teacher mobility patterns. Like other states, California sees much higher turnover in early-career teachers than mid- or late-career teachers. The result is that, even for a 45-year-old teacher with a relatively short break-even period of 7 years, only about half will actually reach that point.

The table below pulls together these two data points for teachers of various ages. The middle row illustrates how long the teacher would be required to stay until her pension would finally be worth more than a cash balance plan (Rhee and Fornia calculate slightly shorter break-even points for their defined contribution plans). The last column uses the state’s turnover assumptions to estimate how many California teachers will remain long enough to break even. Remember, the median teacher in California began teaching at age 29. The table below suggests this typical teacher would have had a break-even point of more than 25 years, and the state assumes that only 40.6 percent of this group of teachers will make it that far. Across the entire workforce, the majority of California teachers would be better off in a cash balance plan than the state’s current pension plan.

Age at which the teacher begins teaching	How many years does it take for the teacher to break even on her pension plan?	What percentage of teachers like her will break even?
25	31	34.6
30	25	40.6
35	19	43.7
40	13	46.6
45	7	54.2

California is a bit of an outlier here compared to other states—it’s a big state and seems to have lower teacher turnover than other states—but it’s still worth asking if this system is working well enough for all teachers. Rhee and Fornia’s main point seems to be that, once you exclude short- and medium-term workers, the remaining teachers tend to do pretty well under the current system. But that excludes lots of people!

I personally don’t think that’s the right way to look at things. I think it’s worth fighting for retirement systems that treat ALL teachers fairly and equitably. After all, teachers might not know how long they’ll stay in the profession. They might not like teaching as much as they thought, or life might take them on another path. And once we account for this uncertainty, the break-even points become less about raw numbers (do I have to stay 19 or 22 years?) and more about probability (what’s my realistic chance of teaching in this state for 31 years?). Looked at from that perspective, it becomes harder and harder to support pension systems with such extreme back-loading.

Photo by cybrarian77 via Flickr CC License

The Pension vs. 401k Debate Harms Teachers

This post originally appeared on TeacherPensions.org.

Each year, around 150,000 new teachers are hired to work in American public schools. Those teachers might not pay much attention to their retirement except to note that they’re enrolled in their state’s pension plan. A “pension plan” sounds good, safe, and secure, much better than “risky” 401k plans typically offered in the private sector.

This is a dangerous and flawed misperception. Of the 150,000 new teachers, slightly more than half won’t stick around long enough to qualify for the pension they were promised. They’ll get their own contributions back, but in most states, they won’t earn any interest on those contributions, and they won’t be eligible for any of the sizable contributions their employers made on their behalf.

These teachers are worse off than if they had been in a 401k plan. The federal government has laws governing private-sector retirement plans to ensure that workers start earning retirement benefits early in their careers, but those laws do not cover state and local governments. Teachers are left exposed to the whims of state legislators, and during tight budget times, states cut benefits for new teachers. Today, nearly every state makes teachers wait longer to qualify for their pension than private-sector workers wait for employer benefits from 401k plans. Four states require seven- or eight-year waiting periods (called “vesting” requirements) and 15 states, including populous ones like Illinois, Maryland, New Jersey, and New York, withhold all employer contributions for teachers until 10 years of service. In these states, teachers could work up to nine years without any form of employer-provided retirement savings. This would be illegal in the private sector.

Teachers are often told they’re trading lower salaries while they work for higher job security and more generous benefits. But that trade only works well for teachers who actually stick around until retirement. Most don’t. Most teachers get the worst of both worlds—they earn lower salaries while they work and they forfeit thousands of dollars in lost retirement savings when they leave. Check out our report, Hidden Penalties, to see how many teachers are affected in your state and how much they’re losing.

Photo by gfpeck via Flickr CC License

Are Teacher Pensions Too Generous, Or Not Generous Enough?

This post was originally published on TeacherPensions.org.

Michael Hiltzik of the L.A. Times and Andrew Biggs of AEI had a spirited Twitter debate recently about whether state pension plans were too generous or not generous enough. They were arguing specifically about California and mostly NOT about teachers, but there are kernels of truth in both their arguments with important implications for teacher pensions.

The debate centered around Biggs’ 2014 piece on “pension millionaires,” those state and local workers who qualify for guaranteed payments in retirement worth more than $1 million. Biggs ran the numbers for full-career state workers in every state and found that it’s not that uncommon for government workers to qualify for retirement benefits worth more than $1 million.

Hiltzik’s main counter-argument was three-fold. One, these workers don’t actually have $1 million that they can spend—it’s merely an estimate of how much they’ll be entitled to based on their many years of government service. Two, the figures do not include Social Security. Since about one-quarter of public employees (and about 40 percent of teachers) do not earn Social Security, their pensions need to be larger to provide them adequate retirement savings. And three, lots of workers don’t stay a full career, and in fact pension benefits on average are much lower than Biggs’ calculations.

So who’s right? They both are! The same pension plan can simultaneously be too stingy for some workers and too generous for others. The average can be modest even as the low end can be very low and the high end can be quite high. To show what this looks like, consider the graph below, which shows how retirement benefits grow over time for Colorado teachers (I’m using Colorado here as an illustrative example, but California and other states would have similar trajectories, and neither state offers teachers Social Security).

Retirement savings grow very slowly in a teacher’s early career. In fact, when we tried to estimate how much a teacher needs to save today in order to have a secure retirement tomorrow, we found about 85 percent of Colorado teachers are on the too-low side. The pension plan is not generous enough for them.

But a Colorado teacher following the graph above qualifies for a steep ramp-up in her benefits at the back-end of her career. Her retirement wealth will quadruple between the ages of 45 and 58, and she can retire at age 60 with a pension worth the equivalent of $906,000 in today’s dollars.

That doesn’t work out to a crazy-high amount in annual terms, but her “replacement rate,” a ratio comparing her pre- and post-retirement incomes, would be more than comfortable. In fact, her total savings rate would surpass what most experts think she’ll actually need in retirement. As Michelle Welch and I calculated in a brief last fall, she has more retirement savings than if she had saved 20 percent of her annual salary each year, compounded at 5 percent interest. She is probably “over-saving” for retirement and would likely be better off with a larger share of her compensation coming in the form of salary increases.

So both Hiltzik and Biggs have valid points, but there’s a danger in solving the wrong problem. If policymakers took Biggs’ argument to the logical extent, they would focus most of their attention on capping pensions and ensuring that no one became “pension millionaires.” But Hiltzik’s preferred solutions of preserving or perhaps even amplifying existing plans aren’t right either. The status quo is the problem here; preserving it leaves 4/5 teachers with insufficient benefits. Simply adding to existing formulas won’t solve that problem. Because pension plans are extremely backloaded, boosting the formula gives a little bit more money to early- and mid-career workers and a LOT more to full-career workers. That would amplify rather than solve the fundamental fairness problems within existing pensions plans.

That’s why our approach here at TeacherPensions is to focus primarily on the lack of generosity buried in most teacher pension plans. Too many teachers are losing out on the chance of a stable, secure retirement. It’s not fair–nor is it worth the political fight–to take away from the “winners” who played by the rules of the current system. On the other hand, the problems can’t be solved with the same old formulas. We have to do something different.

Photo by Derek Bruff via Flickr CC License