Friends Without Benefits

Chad Aldeman and I have a new paper out today about teacher pensions, Friends Without Benefits (pdf). It looks at how the current approach to teacher pensions works in the context of broader retirement security issues.

If you’ve followed our work on teacher pensions you know that we see the fiscal problems facing teacher pension plans as a result of bad decisions by state policymakers and a corresponding lack of fiscal discipline as well as ill-considered benefit enhancements. Shoring that up is a fiscal sustainability issue. But there are also a broader set of design questions given what we know about the changing teacher workforce.  Friends Without Benefits is about those design issues and the impact they have on America’s largest class of B.A. workers.

In Friends Without Benefits we use state pension plan data to estimate how many teachers will qualify for at least a minimal pension benefit. Overall fewer than one in five teachers will stay long enough to reach their normal retirement age. But it varies, for instance,

  • At least two-thirds of teachers in Idaho, California, and Kentucky will qualify for a pension benefit.
  • Nine states—Maine, Vermont, South Dakota, New Hampshire, Mississippi, Wyoming, Texas, Nebraska, and Arizona—and the District of Columbia estimate that fewer than 10 percent of teachers will remain in the state system long enough to earn a secure retirement benefit.
  • Maine estimates that 86.1 percent of teachers will not qualify for a pension, and the District of Columbia estimates that four out of five beginning teachers will not.
  • Only about 25 percent of teachers will qualify in Mississippi, Pennsylvania, New Hampshire, and Hawaii.
  • Fewer than 35 percent of teachers will stay long enough to qualify for a pension in Florida, Nebraska, Indiana, South Carolina, New Mexico, Ohio, Georgia, and North Carolina.

The retirement security issues here are substantial because the savings penalties for mobility are large. An individual teacher could forfeit up to 6.5 percent of her annual salary for one year, or, due to compound interest, 22.6 percent of her annual salary after three years according to the new Bellwether analysis. To put these penalties in dollar terms, a hypothetical teacher earning $40,000 a year could face a savings penalty of $2,601 for teaching only one year and $9,035 if s/he left after three years. Teachers get back their own contributions, if they elect to, but this money stays with the pension funds and is used to supplement the pensions of the remaining teachers.  It’s important to note that there penalties for teachers even if they stay in teaching but build a 30 year career across multiple states or cities. This problem does not just affect those who leave the field.

These issues are becoming more acute because states are addressing pension fiscal problems by making pension plans worse for new and future teachers. The politics behind that are obvious but it’s not good for the field long term. Meanwhile, it’s important to note that just qualifying for a minimum benefit is not sufficient as a personal retirement strategy. What we’re highlighting here might seem like small amounts but remember this is money that could be used as a savings foundation, to grow over decades. Teachers spend, on average, a few hundred dollars out of pocket each year and its a perennial political issue. This penalty is much more substantial yet generally it’s crickets.

The pension debate is too often framed as the status quo versus 401(k) style plans modeled on the private sector. In fact, there are options between those approaches that could work better for teachers and taxpayers. But it’s important to look at those issues through a frame of all teachers, not just the minority who spend an entire career in one place. You can learn more about all that at Teacherpensions.org a site Bellwether set up to provide information on the issue.

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