Workers are living longer, and for pension plans, this means more payments and a bigger overall price tag on benefits.
In order for employers to estimate the cost of retirement benefits, they need to know a variety of characteristics about the current and future retiree pool, including how long a retiree will live. Recently, the Society of Actuaries released new mortality tables, aka death rate data on how long a person can be expected to live into retirement and continue collecting monthly benefits. The tables come from data collected from over one hundred primarily private pension plans and reflect more than 220,000 deaths and over 10.5 million years of life.
It’s morbid, but this new death data has significant implications for the private pension plans who will likely use these new tables, and who have been otherwise using the older tables based on data collected from over 20 years ago. Some plan liabilities will go up by as high as 7 to 8 percent, other plans can expect a 3 to 4 percent increase depending on factors such as workforce composition (i.e., gender and age distribution). Females, for example, tend to have longer life expectancies, and so plans with predominantly female workers will be more affected, all else equal.
Although the report did not collect enough data to evaluate the impact on public pension plans, increased lifespans are certainly an important factor for public sector plans also, especially teacher pension plans which have a predominantly female workforce. And as life expectancies increase, stakeholders will need to responsibly prepare to take on higher retirement expenditures.
Taxonomy:Many of Colorado’s teachers aren’t getting their money’s worth on retirement savings.
Colorado’s Public Employees’ Retirement Association (PERA), the state’s retirement system, has a blog called the Dime. Awhile back they featured a Colorado public employee named Travis. Travis worked as a teacher in North Carolina for two years and now works as a human capital manager recruiting teachers for a competitive charter school, called STRIVE.
The majority of STRIVE’s teachers are early-career teachers with four to five years of teaching experience. Half of Travis’ recruits are Teach for America teachers or alumni, but others are experienced veteran teachers from other states. A large part of Travis’ job is to convince talented teachers not only of the position and school culture, but also that the role offers competitive wages and benefits. The Dime’s post reassures us that the state provides all its workers with excellent retirement benefits:
“For Travis, knowing that PERA maintains a retirement account of employee and employer contributions for every member, regardless of the length of their employment, gives him peace of mind. He knows that retirement savings will be there years or decades in the future, even as he is focusing now on other financial goals and priorities. Retirement is one less thing for him, and other staff at STRIVE, to worry about.”
More likely, however, teachers and workers like Travis are getting shortchanged. He can roll over his accrued savings from North Carolina’s retirement system into an IRA account once he moved, but it won’t be worth very much. Without meeting the state’s pension service year requirements (North Carolina required 10 years of service during his tenure, only recently reverting to 5 years), Travis’ take home savings amount to only a refund of his original contributions—money he personally put into the system. He does not receive any interest on his contributions because the state only recently changed this policy to give teachers 4 percent. Travis forfeited his employer contribution, a penalty totaling nearly $8,400 or 13.12 percent of his salary over two years. On top of it all, he has no rights to a future pension. When he moved to Colorado, he started back at square one with zero years of service on the clock. His two years in North Carolina won’t count toward a Colorado pension.
Similar penalties apply to Colorado teachers. In Colorado, 64 percent of new teachers will not meet the requirements to qualify for a minimum defined benefit pension.* Through the state's money purchase plan, teachers working for less than five years in Colorado can get a full refund of their original contributions and three percent interest, but they get none of their employer’s 15 percent contribution, nor do they qualify for Social Security benefits. For out-of-state veterans, the PERA plan is an even worse deal. Because pensions are not portable, a veteran Colorado teacher who split his or her career over more than one state can end up with multiple half-baked pensions, losing thousands of hundreds of dollars in benefits. Technically, they can “buy” service year credits from Colorado, but this turns out to be a costly and unprofitable purchase. Plus, because teachers in Colorado do not participate in Social Security, they are particularly dependent on their state retirement benefits.
That said, Colorado allows teachers to opt into additional savings vehicles such as a 401(k) and 457 plan. Unlike the traditional pension plan, these plans are portable and can transfer across state lines without penalty; teachers vest immediately and have rights to their own and their employer matching contribution (which vary depending on their employer) and investment returns. While these savings vehicles are intended as a supplemental program, it provides mobile teachers a benefit not found in the PERA plan.
Neither Travis nor any of the teachers at STRIVE have done anything wrong. They have put in tough hours and service years to the profession. Yet, they are severely penalized for moving or working anything short of a full career in one state. Without adequate savings, they will inevitably need to save more money in the future, retire later, or face a less-secure retirement. Retirement, unfortunately, is something for Colorado’s teachers to worry about.
*Update: The original post did not include the word "new." The 64 percent figure represents Colorado PERA's withdrawal estimates, converted to the percentage of new teachers who will reach the state's five-year vesting period for a defined benefit pension. All teachers are eligible for the state's money purchase plan.
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In theory, public sector workers like teachers accept lower current salaries in exchange for better benefits like health care and pensions. But a new paper suggests that common perception about how we pay public sector workers is fundamentally flawed.
A new National Bureau of Economic Research paper from Maria Fitzpatrick examines a real-life choice offered to Illinois teachers in the 1990s. The state offered late-career teachers a chance to upgrade their benefit at a very discounted rate. Based on their responses and take-up rates, they actually valued the pension at only about 20 cents on the dollar. In other words, they'd prefer to have $2 in current wages over $10 in pension wealth (adjusted for today's dollars). Taxpayers and employers have to pay the full cost of the benefit, but, because the true costs are hidden, teachers don't value them fully.
This is a bit like a Christmas gift from your Great-Aunt Mildred. She may have spent $50 on a dandy argyle sweater, but you might only think it’s worth $10. (This isn’t just a silly abstract example; economists have documented that this "deadweight loss" actually happens.)
In this metaphor, teacher pensions are like the sweater: Protective and well-intentioned, but ultimately under-valued and under-appreciated. Teachers would rather just have cash, or at least a nice gift card.
Illinois’ state constitution now guarantees current workers and retirees pension benefits. But nothing in its constitution guarantees that the state fund them.
Illinois has a history of promising much while paying little. According to a recent report, Illinois struggled to fund its pensions for decades, extending back to 1917. Illinois’ first pensions were a fixed, flat annual benefit, but neither benefits nor contributions were tied to salary. Instead, teachers paid an arbitrary flat contribution based on milestone service years. State contributions were based on certain taxable properties. Pensions initially were treated as gratuities or gifts that the state could adjust or take away, and funds were not held in a trust and could be used for other purposes.
Even when pensions were later restructured and included employer and employee contributions tied to salaries, the plans continued to struggle. In 1969, the Illinois Teachers’ Retirement System was 40 percent funded and the Chicago Teachers Pension Fund was only 32.7 percent funded. Overall, the state’s five pension systems were just 41.8 percent funded. This means for every dollar the state needed to fund future payments, it saved only 41.8 cents. Not much has changed since 35 years ago: today the Illinois Teachers’ Retirement System is still just 40.6 percent funded and the Chicago Teachers’ Pension Fund 49.5 percent funded, according to the plans’ own actuaries.
In 1970, the state constitution was amended to include the following (known as the Pension Protection Clause):
Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.
The above language protects pension benefits, but the Constitution is silent on funding those benefits. There is no recourse for forcing a state to pay its annual required contribution or address shortfalls, and Illinois has consistently skipped or shorted its pension payments for decades. On top of this, both politicians and worker unions have an incentive to advocate for pension increases without paying for them.
After the recession, the political landscape turned. Illinois politicians passed legislation that scales down benefits for new workers, enacts a funding plan requiring 100 percent funding by 2043, and provides a funding guarantee (if the state comptroller fails to make state pension contributions, affected pension systems can sue to order payment). The legislation, however, was challenged and will be argued in the upcoming month and may eventually proceed to the state Supreme Court. The decision will have big implications for how Illinois deals with its growing pension shortfalls and worker benefits in the future.
Illinois has carried significant pension debt for close to a century. What makes this different is now the costs are starting to catch up. Consistently short funding pensions has led to higher contributions and rising debt costs that eat into salaries and other social spending. It’s time for Illinois to change the course of its history.
New Jersey has a gaping $3 billion hole in pension funding. But there’s more at stake than just finances. Undergirding New Jersey’s deepening pension hole is a system that disadvantages the majority of its teachers.
Last week the newly formed bipartisan New Jersey pension commission issued a report, detailing grim numbers on escalating benefits costs. Missing from the report, however, was how the current system impacts the workforce.
For teachers (who make up over 60 percent of workers covered by New Jersey’s state pension plans) the current pension system disproportionately allocates benefits. Close to half of New Jersey teachers won’t qualify for a minimum pension. That means, for the 153,500 teachers currently in the system, nearly 70,000 won’t receive any retirement benefits despite paying into the pension system. Of the remainder who do qualify, many won’t break even according to an Urban Institute report and will end up contributing more towards the system than what they will get back in benefits, losing money.
In crafting their proposal, the Commission needs to consider the impact that policy changes will have on individual teachers and the teaching workforce as a whole. Teachers need a flexible yet secure retirement plan. A well-designed 401k plan can address these problems, but a poorly designed one could just as easily fail teachers. Also, there are other alternatives. A smooth-accrual defined benefit or cash-balance plan is another viable design that can be fiscally sound while making sure teachers have sufficient benefits and rewarding them for their service.
By focusing only on finances, the Commission is missing a key opportunity to create a more fair system and opens the door for a misaligned solution. The answer can’t just be cut benefits—New Jersey needs to restructure and rethink the overall design of its retirement system to make it better for all workers.