Student loan debt passed the $1 trillion threshold a few years ago. And now, credit card debt has also reached that unfortunate milestone. This rapid growth in debt occurred despite the fact that wages, for the most part, have remained stagnant for decades. To reverse this trend, financial literacy and planning will be increasingly important.
A new study from WalletHub finds that financial literacy and sound financial practices vary widely by state. According to WalletHub’s analysis based on their own financial literacy survey as well as other measures of financial tools and habits, these are the most and least financially literate states in the country:
It is a problem, particularly for teachers, that financial literacy and planning varies so widely since teacher retirement plans require a good deal of financial savvy to understand.
That may not be apparent at first glance. The vast majority of public school teachers in this country are enrolled in state-run defined benefit (DB) pension plans. Teachers are automatically enrolled in those plans, and all investment decisions, including how much to contribute and how to invest those contributions, are made by the states.
But the benefit formulas are actually quite complicated, and there's mounting evidence that the plans fail to provide most teachers with benefits sufficient to meet their retirement needs. Due to different decisions in state legislatures, pension rules vary from state-to-state, leading to different vesting periods, variation in teacher contribution rates, and differences in benefit quality.
Furthermore, the majority of state pension funds are non-portable. This means that they cannot be taken across state lines if an educator moves. The lack of portability can dramatically, and negatively, affect a teacher’s long-term retirement savings. And finally, around 1 million teachers are uncovered by Social Security, which leaves them more dependent on their own personal saving.
In short, teachers may think that because they are enrolled in a pension system their retirement is taken care of for them by the state. But, that only works for a handful of educators. The rest have to figure out whether they’re covered by Social Security, how to make up for years of low savings rates for the pension fund by the state, and what to do if they leave teaching or cross state lines. None of these are easy decisions, and a recent a study of Illinois educators suggests many are doing it “wrong,” at least in financial terms.
Although it does not deal directly with teacher pensions, WalletHub’s study is a useful prism through which to understand the financial challenges facing teachers. And while much could be done to provide educators with better retirement options, states need to, in the meantime, do more to educate their workers about the true value of their pension at various points in the career and what to do when they leave the profession.