Is Missouri's teacher retirement plan one of the best in the nation? That depends on who's asking.
Here's the perspective of one former Missouri teacher:
For this person, the Public School Retirement System of Missouri (PSRS) worked quite well. But does it work as well for other teachers? And did she "pay for" the benefit she's collecting? Let's run through the numbers. (I won't identify the individual by name, but her gender does matter for our calculations).
First, let's assume this person was earning about $55,000 when she retired, the average salary for experienced teachers across Missouri. Based on some assumptions* about how fast her salary might have grown, how much she would have contributed to the pension plan, and how well PSRS was able to invest the money and make it grow over time, I estimate the total value of the teacher's contributions comes out to about $360,000.
That figure doesn't include employer contributions. In Missouri, school districts match the employee's contributions toward the pension plan. So all in, the teacher and her employer contributed about $720,000 toward her pension.
Do the numbers work out? To find out, let's do some math on the value of her pension. Missouri allows a teacher to retire with 25 years of service at any age. They can begin collecting a pension benefit worth 2.2 percent times their final salary times their years of experience. (Missouri takes the employee's average salary over their final three years of service, but for simplicity's sake let's stick with the same salary figure as above.)
Her annual pension benefit is worth:
Annual Pension = 2.2 percent X 25 years X $55,000
Annual Pension = $30,250
Now, an annual income of $30,250 is not a lot of money. But this person chose to retire; perhaps she feels comfortbale living off that amount, or she's free to pursue another career if she wants to. Missouri pensions also include cost-of-living adjustments, so her pension will grow and keep up with inflation over time.
Also, note that this person gives her age as 46 years old. According to the Social Security's actuarial tables, a typical 46-year-old woman is expected to live another 36.9 years. That means we can expect her to collect a Missouri pension for another 37 years!
Once we account for her starting pension amount, the cost-of-living-adjustment, and her long life expectancy, this teacher's pension is worth more than $1.6 million. That's more than twice what she and her employers contributed toward the plan. Given these calculations, it makes sense that this teacher feels like "Missouri's Teacher Retirement System is one of the best in the world!"
To be fair, the individual teacher here did nothing wrong. She contributed exactly as she was told, she never missed a payment, and she took advantage of a promise the state made to her and her colleagues.
But she certainly did not "pay for" the benefit she's receiving. And her comments present a good case study of common misunderstandings about teacher pension plans.
First, older teachers retiring today are getting much better benefits than the next generation of teachers will. Like other states, Missouri enhanced their pension formulas multiple times in the 1990s, only to have to increase employee and employer contribution rates later in order to pay for them. This particular retiree will reap the benefits from the enhancemed formulas and she avoided having to pay the higher contribution rates for most of her career. On the other hand, new teachers in Missouri today will be worse off--they're more than paying for the mistakes of the past.
Second, most teachers in Missouri don't last as long as this person did. Maybe they don't like teaching as much as they thought they would, or life happens and they need to stop working, or they move to another state to be closer to family. Those people would all be better off in a more portable retirement system than the one PSRS offers, especially because Missouri has chosen not to enroll its teachers in Social Security. The majority of people who enter the teaching profession in Missouri will leave with inadequate retirement benefits.
Third, is this the highest and best use of educational resources? Today, the PSRS actuaries estimate the plan benefits are worth an average of 17.4 percent of each teacher's salary. Compare that to the fact that employees and their employers are each contributing 14.5 percent of the employee's salary, for a total of 29 percent, toward the pension plan. The difference between these two figures (29 percent minus 17.4 percent) is the amount needed to pay off PSRS' $7.4 billion in unfunded liabilites. Put another way, that's 10.6 percent of each teacher's salary that is going to pay off pension debts. If Missouri legislators had been more responsible in the past, that money could have been spent today on raising teacher salaries, buying new textbooks, expanding art or foreign language programs, or pretty much anything else.
A retirement system that was truly the "best in the country" wouldn't force these tough decisions. It would provide real retirement security to all of its members, not just 25-year veterans, and it would ensure that educational dollars were being spent on today's teachers and students, not past debts.
*Note: I'm using PSRS' assumptions for salary growth rates and investment returns, and I assumed PSRS' current 14.5 percent employee and employer contribution rates.
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