Blog: State Pension Plans

State-based teacher pension plans are important. They make up an enormous portion of local K-12 budgets, and the vast majority of them are underfunded. But despite their weight, or maybe as a symptom of, the intricacies of these systems can be difficult to navigate. The National Council on Teacher Quality’s recent report, Lifting the Pension Fog, works to demystify the topic. The NCTQ team, in partnership with EdCounsel, collected teacher retirement data from all 50 states and the District of Columbia. We’re eager to build on their work in a forthcoming piece; they’ve provided a lot to work with. One data point that stands out though, is rising contribution rates.

NCTQ researchers found that just eight states have reasonable contribution rates – which they define as a combined contribution rate of 10-15 percent of salary. Unfortunately, a significant portion of pension contributions today are going toward debt costs – not to teachers themselves (see Figure 3 here). We’ve written about this before, but the short of it is that today’s new teachers are paying for years of pension system underfunding in the form of lower benefits and stagnant salaries. State pension debts are posing risks to hiring and retaining a quality teaching workforce.

But employer contributions are just one part of the plan. The graph below shows total teacher pension contribution rates (the table at the bottom of the post has the same data in text format). The blue bars represent the employer contribution (which can come from the state, a district, or both), and the orange bars represent the employee’s share. 

As the graph shows, the total contribution rates are daunting. The average is now 24 percent, and states like Pennsylvania, Kentucky, and Illinois are all contributing over 40 percent of a teacher’s salary into their state retirement system. Other states are heading in that direction.

Both teacher and employer contributions have been trending upward. Since 2008, 30 states have increased teacher contributions. In 1982, only 13 state plans had employee contribution rates of 7 percent or above. Today, 29 do.

For some professions, it’s all about: “location, location, location.” For online start-ups, you probably want to be in Silicon Valley.  If you want to work on the stock market, head to New York City. But for teachers, where you work doesn’t matter, right?

Wrong.

According to WalletHub’s recent analysis, there is significant variation in teacher job quality from state-to-state.

But WalletHub’s rankings shouldn’t be taken at face value. And, as with any aggregate state ranking, the devil is in the details. About 14 percent of their total Job Opportunity & Completion Rank is based on the cost-adjusted “average” teacher pension in each state.

That’s a big problem. Averages can easily distort what’s actually going on.

Evaluating teacher retirement systems based on the average pension is misleading, because the majority of teachers do not even receive a pension. In Washington, D.C., for example, the average teacher pension is extremely high at almost $65,000, but only 29 percent of teachers ever qualify for a pension. So rating D.C.’s pension system on the average benefit of those who remain misrepresents the retirement realities teachers face. Simply put, a state’s average pension value does not provide much useful information about the quality of teachers’ retirement.

There are a couple of ways WalletHub could have evaluated state pension systems more effectively. For example, they could have used a vesting rate. This would grade states on the percentage of teachers that actually qualify for a pension. But even that won’t address other important concerns, such as whether teacher retirement benefits are portable or whether a state’s pension system is financially stable.

In WalletHub’s defense, teacher pensions are complicated. In fact, this points to a larger problem: teachers often lack sufficient information about their retirement. What is the vesting period? Do I qualify for Social Security? What is the retirement age?

The answers to these questions matter.