As urban legend has it, a Harvard Law School dean walked into an orientation for incoming students and told them to, "Look to your left and then look to your right, because one of you won't be here by the end of the year." School administrators should be providing similar warnings to new teachers. They should say, "Look at the person next to you. One of you won't receive a pension. You'll leave your service here without any employer-provided retirement benefits. Better start saving."
As I write in a new piece for the Detroit News, high mobility rates and a 10-year service requirement for teachers to qualify for a pension ensure that less than half of Michigan's new teachers will remain long enough to earn a pension. Additionally, Michigan does not allow a teacher who leaves before 10 years to receive any of their employer's contribution. Teachers leaving before then will forfeit the entirety of 16.8 percent of salary that employers contributed on their behalf. This adds up to a significant savings penalty for individual teachers: A hypothetical Michigan teacher earning $40,000 a year would forfeit $7,266 if she leaves after one year or $90,738 if she leaves after nine years.
Teachers should be warned about the savings penalty in their states. Read the full piece here.
Every year nearly 270,000 teachers leave public schools, and by consequence, their state or district retirement system. As teachers leave, what happens to their pension contributions? Teachers in every state have the option of withdrawing or cashing out their pension contributions when they resign. But many simply forget and end of up leaving thousands of dollars in the state coffers.
Each pay period, a teacher contributes a percentage of her paycheck to the state or district retirement system. These contributions go into a pension trust fund that will be used to help fund future teacher pensions. Teachers who leave the system before qualifying for a pension, however, have the option of withdrawing their retirement contributions plus interest in certain states (see our recent report for more details). Many teachers who leave, however, end up leaving their pension contributions as well.
For example, the median salary for a New York state teacher with a bachelor’s degree is $40,083. Assuming she pays the required 3.5 percent contribution rate (the percentage paid by teachers hired between 2010 and 2012), she would contribute over $1,400 per year. Her total contributions will vary depending on how long she stays in the classroom. Upon leaving the system, NYSTRs employees can withdraw their contribution plus interest but forfeit all employer contributions (currently 11.11 percent of payroll). Put in relation to the state pension’s 10 year service requirement, a teacher could work for up to nine years and then leave the system before qualifying for a pension. If she fails to withdraw her contributions, she potentially leaves behind over $9,000 of her own money.
By state law, NYSTRS must follow a set of procedural steps before deeming a benefit “abandoned.” The comptroller must notify the non-vested teacher (the teacher who does not qualify for a pension) five years after she leaves the system about claiming her contributions. The comptroller will then publish the names of teachers whose contributions remain unclaimed. If the teacher does not file a claim with the comptroller within 18 months from the date of the comptroller’s first notice, the teacher’s contributions will be declared officially “abandoned” and will be transferred back to the pension accumulation fund. However, the teacher retains the right to file a claim and receive her contributions back, even if a teacher’s funds are deemed abandoned. These rights persist even if the teachers dies, whereupon her beneficiary or estate retains the right to claim the contributions.
The New York State Teachers’ Retirement System (NYSTRS) publishes a database of unclaimed and abandoned retirement benefits. The NYSTRS database lists 1,315 names in the unclaimed account, and 6,529 names in the abandoned account. This means that there are nearly 8,000 teachers who have forgotten to claim their contributions. Eventually, these unclaimed contributions are deemed truly “abandoned” funds and put into the state’s pension accumulation fund. That is, abandoned funds become property of the state unless otherwise claimed by the teacher or her beneficiaries.
Unclaimed money is not an anomaly of the public sector. The Pension Benefit Guaranty Corporation, a government agency that protects private pension beneficiaries, holds over $300 million in unclaimed benefits in the U.S. and $42 million in in New York alone. The New York Office of the State Comptroller is custodian to over $12 billion in unclaimed funds from banks and companies who are required to relinquish unclaimed accounts to the state. Teachers leaving the classroom are unfortunately contributing to this wasteful and expensive habit.
This post originally appeared on Eduwonk.com.
With all the noise about teacher pensions (and lately it’s more noise than signal) it’s interesting that Social Security receives so little attention. Social Security impacts teacher retirement and is also an illustrative comparison point in terms of the decisions facing policymakers.
Let’s look at the impact first.
As Chad Aldeman and I noted in Friends Without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security (pdf) about 40 percent of teachers are not covered by Social Security because they teach in jurisdictions that have not elected to participate in Social Security. This means these teachers don’t contribute to the Social Security system (7.65% of their income up to $117,000 this year with a corresponding 7.65% contribution from their school district) but it also means they don’t earn Social Security credit toward their retirement benefit. Some or all teachers in fifteen states—Alaska, California, Colorado, Connecticut, Georgia, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio, Rhode Island, and Texas—are not enrolled in Social Security.
By way of background, from Social Security’s inception until 1950 all State and local government employees were excluded from Social Security coverage. Congress enacted legislation in 1950 that allowed voluntary participation by State and local governments for employees not covered by another pension system. About 28 percent of state and local government workers are not covered today.
Given the general benefits of Social Security you’d think the teachers unions would be at the forefront of trying to get their members covered by it. You’d be mistaken. They oppose mandatory coverage and instead focus their efforts on eliminating complicated Social Security rules that exist to ensure that people who are covered by pensions cannot also collect a “windfall” in retirement based on Social Security’s progressive benefits formula.* (Yes, organizations that can’t say enough about how progressive they are champion policies that cut against the progressive nature of what’s arguably America’s most successful progressive program. Sound odd? Welcome to the through the looking glass world of education politics). So despite all the toxic rhetoric about pension reform – a genuine problem – you don’t hear much about getting teachers into Social Security.
Social Security alone is not sufficient as a retirement plan for teachers. Whether through defined-benefit plans, 401k-style plans, or hybrids such as cash-balance plans states and school districts must to more to ensure teachers are on a secure footing for retirement security. But Social Security is a portable retirement benefit that works favorably for teachers as part of a basket of supports.
Social Security is also illustrative as a comparison point for what’s happening with teacher pensions. For starters it’s a national program. Teacher pensions, by contrast, are state and local. As a result the overall descriptive numbers about them obscure a great deal of variance. Some pension programs are well-funded and stable, others are facing serious shortfalls. We took a look at that a few years ago in Better Benefits.
Second, “fixing” Social Security is substantively pretty straight-forward albeit politically very difficult. Raising the contribution limit and increasing the progressive features of the program are the most obvious levers (there is also a lot of support for raising the retirement age, which sounds a lot better if you do professional work rather than real labor).
Teacher pensions face problems that go beyond financial shortfalls. In particular, traditional pensions are increasingly a bad fit for a more mobile teacher workforce and an American workforce where people change careers more. This problem is becoming more acute as states increase the length of time it takes to earn a pension benefit in an effort to save money. We’re not talking about just a few years, seventeen states now have vesting periods of 10 years. In 1988, if you asked teachers how many years of experience they had, the most common answer was fourteen or fifteen years. If you asked the same question in 2008 the most common answer would have been one year, followed by two years. So there is a design problem as well as an actuarial one.
The solution? There are not easy ones but we suggest some ideas to tackle both issues in Friends Without Benefits. And we do think including all teachers in Social Security has to be part of the solution package.
*The Social Security Windfall Elimination Provision or WEP exists to remove the windfall that the Social Security benefit formula provides to individuals who have substantial pensions from employment not covered by Social Security. Essentially, the Social Security benefit formula provides workers who spent their lives in low paying jobs relatively higher wage-replacement rates than it does for higher-paid workers. As a result, without the WEP, a worker who spent a substantial part of their career in employment not covered by Social Security would be treated as a low-lifetime earner for Social Security benefit purposes and receive the advantage of the weighted benefit formula.
Starting in 2016 Virginia will require social workers, teachers, and other municipal employees to pay 5 percent of their salaries into their pension plans. But instead of merely requiring employees to contribute the 5 percent, the state legislature simultaneously required localities to match those contributions with increases in base salary. That may sound like a simple plan, but it's turning out to be complicated. AsThe Daily Progress reported earlier this week, districts can contribute to a pension plan on an employee's behalf without incurring Social Security and Medicare taxes. But if the district raises salaries so that a teacher pays the pension plan, the teacher incurs taxes along the way. To make the same 5 percent contribution rate, Charlottesville, VA schools actually raised teacher salaries by 5.4 percent to ensure that teachers didn't have their take-home pay diminished.
Over time, this may eventually shift the inter-generational cost burden as well. Because pensions are based on an employee's final average salary, when districts increase salaries they're also increasing future pension payments. For teachers retiring soon after the change, in 2016 or 2017, they'll only pay the 5 percent contribution rate for one or two years but will reap the benefit of an increased pension for the rest of their lives.
The article doesn't get into this, but one upside to Virginia's change is enhancing transparency around public-sector employee compensation package. In too many places, employers pick up all or a large share of pension and healthcare costs, obscuring the real costs of the benefits. Workers tend to appreciate a dollar in salary more than a dollar in benefits, and it's a good thing to have more transparency about where their dollars are being allocated.
As legislators in Illinois and other states face similar dilemmas about who pays the costs of pension payments, they should keep in mind these issues of fairness, equity, and transparency.
Taxonomy:In the late 1990s, state pension funds experienced surpluses from high returns in the stock market. Rather than prudently saving the surplus funds, many states passed legislation to enhance or increase pension benefits for public workers.
In a recent paper, economists Cory Koedel, Shawn Ni, and Michael Podgursky analyzed who benefitted from a series of pension enhancements in Missouri in the late 1990s and early 2000s and by how much. As the authors calculate, teachers who were already well into their teaching career received benefit increases of over $100,000 in estimated pension wealth. However, to pay for the benefit enhancements and a falling stock market, Missouri has been forced to increase teacher contributions to the pension plan. That contribution increase was not enough to cancel out the benefit increase for late-career teachers, but it erased all gains for teachers who were early in their career at the time. Most importantly, because both employees and their employers were now paying higher contribution rates, it made the overall compensation structure much worse for all new teachers. That system still exists today.
You should read the full paper, but to show the effect of the benefit enhancements for mid- and late-career teachers I created the gif below from the authors' Figure 1. It shows the changes in pension wealth for someone who began teaching in Missouri schools at the age of 25 in 1983. Her benefits improved substantially as a result of pension formula enhancements in 1996, 1999, 2000, and 2002, creating a much more generous benefit at the back end of her career. The dotted line in all the graphs is the baseline year of 1995.
Chart: Missouri Pension Wealth Accrual Before and After Benefit Enhancements, 1995-2002
Source: Figure 1 here.
The California Public Employees' Retirement System is twisting itself in knots trying to show how much value it adds to the state's economy. CalPERS distributed $12.7 billion in pension payments last year so its size isn't in question, but from there it takes credit for "supporting" 1.5 million jobs through its investment portfolio including iconic California companies like Google, Apple, and Walt Disney.
This is downright goofy logic--through my own investments in mutual funds, I'm sure I personally own a tiny share of these companies too. But I'd never take credit for "supporting" jobs at those companies. Presumably, just like me, CalPERS holds those investments because they're trying to make money to pay for future retirement payments; any jobs we support are entirely peripheral.
What's more, note that CalPERS is taking credit for three popular companies, but it doesn't want you to press too far into all the companies and industries it supports. The same report notes that CalPERS is also a large investor in the "Securities, commodities, investments and related activities" and "Petroleum refineries." Would it be as proud of "supporting" jobs at Goldman Sachs or Sallie Mae? What about ExxonMobil or British Petroleum? Not to pick on CalPERS, but any large and broad investing effort is likely to end up making investments not all of its members support.
CalPERS also uses a rather magical accounting trick to estimate that every dollar in taxpayer contributions turns into $10.85 in economic activity. Back in the real world, statistical analyses of the American Recovery and Reinvestment Act pegged the mulitplier effect of the stimulus as low as .02 and as high as 2.31 for every dollar invested. CalPERS wants you to believe that its annual pension payments provide better stiumuls than a one-time federal investment during one of the worst recessions in modern history.
As I've written before, these types of analyses from pension plans are nonsense because they ignore opportunity costs. As the Wall Street Journal noted, "California taxpayers have sunk about $70 billion into Calpers over the last decade, which they otherwise could have spent on more productive enterprises or pursuits. For every one dollar workers contribute to their retirement, taxpayers are investing two. Local sales and property taxes have risen to pay for increasing pension payments. Public workers have also been laid off and infrastructure delayed—all of which has depressed economic growth." Sloppy economic analyses like the CalPERS report do a disservice to the public debate and shroud the conversations we should be having about trade-offs, value, and how best to provide secure retirement benefits to all workers.
Taxonomy: