The Pension vs. 401k Debate Harms Teachers

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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

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