Returning Sense and Security To Teachers' Pensions
State and local governments have failed to responsibly manage public retirement systems, and this has become a big problem.
Governments now owe their retirement plans between $1 and $4 trillion for benefits workers have already earned. As a result, average taxpayer contributions to cover the cost of public retirement benefits have nearly tripled since the turn of the millennium.
Public school district budgets have been hit particularly hard. District contributions for public teacher retirement benefits have risen from around 12 percent of payroll in 2004 to just over 19 percent today — an increase of more than 60 percent. Growing retirement costs for legacy benefit promises have made it difficult for districts to hire new teachers or even give current teachers a raise.
And rising pension costs are not the only problem with the current system. Teachers' retirement benefits are often quite backloaded, meaning teachers earn most of the benefits late in their careers. This puts young teachers at a disadvantage, leaving them without enough savings to reach a secure retirement through much of their careers.
In 15 states, teachers must now teach for 10 years before they are eligible to receive a retirement benefit. Teachers in these states are offered no retirement saving over the first third of their careers. Given that most teachers will leave prior to reaching their tenth anniversary, and only about 28 percent of teachers remain in the profession for 20 years, these systems leave the majority of those who teach without the savings necessary to reach a secure retirement.
You might think that these systems are anomalous, but they are more the rule than the exception. A 2014 report from the Urban Institute highlighted just how bad public retirement systems can be for young workers. In 86 percent of teachers' pension plans, new teachers must work more than 10 years before earning any retirement compensation from their employer. And in nearly 40 percent of teachers' plans, new teachers must teach more than 25 years before the value of their benefits exceeds their own contributions and investment earnings.
And the problem of back-loaded retirement benefits gets worse. Because the value of benefits can jump by $100,000, $200,000 or more in the span of a year or two, current systems present very strong financial incentives as teachers near their systems' retirement eligibility thresholds. These incentives potentially keep many teachers in the classroom well beyond their desire to be there. And once teachers are eligible to retire, the value of their benefits generally declines, providing a strong push out the door to many great teachers.
For one to believe that these incentives are effective workforce tools, one would have to argue first that state legislators understand these systems and second, that they know when all teachers in their state should leave the classroom.
Fortunately good solutions to these problems already exist. In recent work, Marcus Winters and I have highlighted how cash balance plans, which offer the same investment and longevity protection as current systems but allow teachers to earn retirement benefits more evenly across their careers, should be preferable to the current system. Because a cash balance system increases retirement savings for young teachers, these plans reduce the chance that any teacher leaves without adequate savings to reach a secure retirement. And since they allow teachers to earn benefits more evenly, there would no longer be any arbitrary financial incentives pulling teachers in through certain ages and pushing them out of the classroom thereafter.
Cash balance and well-defined contribution plans can not only solve these benefit design problems, but these types of plans are also simpler and more transparent, reducing the opportunities politicians and others have to play games with teachers' retirement security. It's time we fix our nation's teacher retirement systems so that all teachers are placed on the path to retirement security.
This piece originally appeared in Washington Examiner
This piece originally appeared in Washington Examiner