We've invited a range of panelists—from union leaders to economists to teacher voice organizations—to participate in an online forum on teacher pensions. We’ve collected their responses and will be posting the authors’ contributions here, in their own words, on a rolling basis this week.
Today's guest post comes from Josh B. McGee, the Vice President of Public Accountability at the Laura and John Arnold Foundation.* As an economist and public policy expert, Josh focuses primarily on educating the public and policymakers about the nature and size of the public pension crisis problem as well as potential structural reforms that are comprehensive, sustainable, and fair.
1. Is there a teacher pension crisis? If so, what exactly is the problem?
Elected officials have been shortchanging public employee retirement plans for more than a decade. Public pensions are now more than $1 trillion underfunded. While the current situation does not represent a crisis in most jurisdictions, action is still needed to remedy problems that could undermine teachers’ jobs, salaries, and retirement security for decades to come.
The seeds of the current predicament were sown well before the 2008 financial crisis. Governments (and corporations, for that matter) have a long history of promising benefits without paying the full cost. The 1990s are littered with examples of plan sponsors enacting retroactive benefit increases and taking pension holidays without regard for the future consequences of their actions. Likewise, after the dual recessions of 2001 and 2008, plan sponsors engaged in, and continue to engage in, any number of practices that push the cost of past service onto future generations of workers and taxpayers.
The result has been predictable – rising legacy costs have begun to crowd out current classroom spending. Teachers, especially new, young teachers just entering the workforce, face stagnant salaries and steep cuts to retirement benefits. If nothing is done to improve the sustainability of the system, teachers will be destined to face additional benefit cuts the next time the markets hit a snag or politicians decide not to pay for the benefits that have been promised. In the end, it is the very teachers the system is meant to protect who lose when they are forced into a post hoc negotiation over a pension debt.
The problem is threefold. (1) The current system’s cost structure is opaque and unnecessarily complex. Estimating cost accurately requires predicting a whole host of variables, many of which are not core to the promise being made to workers over a very long-time horizon. (2) The opaque nature of the cost and the great length of time between when benefits are funded and when they are eventually paid out provide both the opportunity and a strong incentive for politicians to underfund benefit promises. (3) Current reporting standards and funding practices do not hold plans’ sponsors accountable for imprudent or reckless decisions.
Importantly, it is entirely possible, both in theory and in practice, to design a system that solves all three problems while still maintaining investment and longevity protection for workers.
2. How do we ensure that teachers have secure, sustainable, and affordable retirements?
There is very little mystery as to how to provide workers with retirement benefits that are affordable, sustainable, and secure. First and foremost, plan sponsors must pay for their promises. This means adopting a responsible plan to pay down the accumulated pension debt over a reasonable time frame. Plan sponsors should target at least 100 percent funding within a closed, 30-year period. Plan sponsors should avoid schedules with negative amortization and should strive to pay down the pension debt over as short a time period as is possible. And any future pension debt that accrues should be paid down in a similar fashion. It is time to put an end to pension holidays and partial payments.
Additionally, plan sponsors must address the current system’s benefit-design flaws. Teachers in many jurisdictions earn very meager benefits through much of their careers placing them on a retirement-insecure savings path. The majority of those who enter the classroom leave before ever earning a secure retirement. Teachers also face very strong incentives to work for a certain number of years and then retire regardless of their desire to teach or skill in the classroom.
Many pension plans have adopted partial fixes that were meant to address these design issues. For example, deferred retirement option programs (DROP) reduce the financial hit teachers take for working past the plan’s normal retirement age, and some plans, like those in Wisconsin and Oregon, essentially offer teachers the better of a cash balance plan or a traditional final average salary pension to mitigate retirement insecurity in the early and middle portions of a teacher’s career. However, these partial fixes only complicate the system further, making it difficult to understand for both teachers and the plan sponsor who are supposed to fund the benefits.
When discussing plan design, I am reminded of Occam’s razor, which holds that the simplest solution is the best. Retirement savings plans should be simplified such that benefit accruals and cost are more closely connected, investment and longevity protection is explicit and easy to understand, and there is a clear plan to deal with cost uncertainty.
The key elements that all primary retirement plans should include are:
- Automatic or mandatory enrollment.
- Sufficient contribution and benefit accumulation rates at all stages of an employee’s career.
- Short vesting periods not to exceed five years.
- Access only to pooled, professionally-managed investments with low fees and appropriate asset allocations.
- Automatic or mandatory annuitization upon retirement.
- Appropriate defaults for investment, withdraw, and benefit payouts.
Placing all workers on a path to a secure retirement regardless of tenure or when they were hired should be the principle aim of any retirement system. Unfortunately the current system falls short of this aim in most jurisdictions today.
*Disclosure: The Arnold Foundation provides support for teacherpensions.org.
Taxonomy:We've invited a range of panelists—from union leaders to economists to teacher voice organizations—to participate in an online forum on teacher pensions. We’ve collected their responses and will be posting the authors’ contributions here, in their own words, on a rolling basis this week.
Today's guest post comes from Dennis Van Roekel, the president of the National Education Association, which represents more than 3 million public school employees. As NEA president, he leads the nation’s largest labor union and advocate for quality public schools.
1) Is there a teacher pension crisis? If so, what exactly is the problem?
There is no teacher pension crisis. Much of the media has bought into the distortions of anti-pension advocates who spread the belief that public education pension plans are bankrupting states and hurting middle-class taxpayers. The truth is that the vast majority of public education pension plans – which like all institutional investors, took a huge hit when the stock market plummeted in 2008-09 - have rebounded strongly and are more than adequately funded. Double-digit returns were the norm for public pension funds for the year ended June 30, 2013, with the median return of the funds analyzed by Pension & Investment magazine at 12.45%. The plans that are struggling are in states that chose not to make their required contributions during good economic times. Most states now face pension shortfalls that are manageable over the long term and do not require any significant increases in contributions or decreases in promised benefits. It’s also worth noting here that most public employee pension plans require employees to contribute a percentage of their salaries to the plan.
The real pension crisis facing this country is the number of workers who are not covered by any retirement plan. According to the Bureau of Labor Statistics, only 48% of all private sector workers participate in a retirement plan.
In terms of teachers and other public school employees, the real challenge is recruiting and retaining the most accomplished professionals to help ensure the success of all our students and ultimately our nation.
2) How do we ensure that teachers have secure, sustainable, and affordable retirements?
Maintaining the defined benefit (DB) plan as the vehicle for providing retirement benefits is the best way to ensure that education employees have a secure, sustainable, and affordable retirement. DB plans offer middle-class school employees benefits that will ensure that they remain in the middle-class into retirement. First and foremost, DB plans provide lifetime income. A defined annual benefit also means that retired public education employees will have an easier time budgeting for their regular expenses, because their pension check will not fluctuate with the ups and downs of interest rates or the stock market. Another reason DB plans benefit public education employees is that almost all of them provide disability and survivor benefits as well as retirement income.
There is no debating that with traditional DB plans, funding is an important concern that needs to be addressed. NEA believes that pension plans must be funded in a manner that assures the plans’ long-term stability so that promised benefits will be paid when due. Funding policy must address how the contributions will be made for ongoing benefits as well as how to finance gains or losses as experience occurs.
NEA also believes that pension funding should follow two key principles:
- When actuarial liabilities exceed actuarial assets, the state and/or employer must make the necessary additional contributions to amortize the unfunded liability in no more than 30 years.
- When actuarial assets exceed actuarial liabilities, the state and/or employer should not reduce the rate of contributions below the normal cost of the plan
In terms of taxpayer cost and affordability, because DB plans have higher returns, more balanced portfolios, and greater ability to pool risk, they cost about half as much as 401(k)-type plans to provide the same level of benefit according to the National Institute on Retirement Security. DB plans also benefit the taxpayer by discouraging costly employee turnover. In fact, DB plans encourage individuals to make teaching a long career, which helps to ensure a stable and productive workforce, and that’s a vital benefit for our nation’s schoolchildren and communities. Protecting the economic future of public school employees is not only the right thing to do, it is the smart thing to do—secure retirement helps ensure that all our students have highly accomplished professionals in their schools and classrooms, preparing them for college and careers.
Taxonomy:We've invited a range of panelists—from union leaders to economists to teacher voice organizations—to participate in an online forum on teacher pensions. We’ve collected their responses and will be posting the authors’ contributions here, in their own words, on a rolling basis this week.
Today's post comes from Celine Coggins, a former teacher, who is now the founder and CEO of Teach Plus, a non-profit that operates in six cities training teacher leaders to transform schools and influence policy.
My dad taught for 30 years in the same high school, owned his own home from the early days of his career, and raised 6 children on his income alone. He’s been comfortably retired since his mid-fifties enjoying the return on the three decades he invested in the classroom. His pension allows him to stay in his middle-class home, golf to excess, and, quite possibly, spend more years of his life collecting a pension check than a paycheck. His life embodies the essence of the American Dream circa 1969—the date at which he entered the workforce. He had the good fortune of his working years coinciding with an era of strong unionism and, relatedly, a robust middle class.
His story offers a layman’s entry point into the complex issue of pension reform and how it relates to broader economic and demographic trends. His story—the quintessential Baby Boomer story—presents a sharp set of contrasts to a teacher’s life in 2013.
Career Expectations. A pension system that was ideal in the era where a career was defined as a decades-long relationship with one employer is now serving a world in which the average worker stays at a job for 4.4 years. In urban teaching, where thousands of newer teachers are subject to layoffs annually, the churn is even more frequent.
Middle Class Purchasing Power. In 1973 at the end of his fourth year of teaching, my dad got a mortgage for a $34,000 home (the precise median home price in America that year) based on his $11,000+ annual income. His mortgage fit squarely into the “three times annual income” calculation that banks use in determining how much home a borrower can afford. Fourth year teachers in America today, by comparison, effectively cannot consider a home priced at the national median of $242,300.
Life Expectancy. When Baby Boomers began entering the workforce in the late 1960’s, the average American lived for 69.7 years. Today, the average US resident can expect to live a decade longer (to 79.3), at minimum tripling one’s “retirement” years.
With a few decades of historical perspective, two things become clear: the first is how good teachers’ total compensation was a generation ago and second is how broken the system is becoming now. A teacher entering the classroom today benefits far less from the early stability and purchasing power of his career choice than a teacher in 1969. Even without a degree in actuarial math, it is obvious that retirement benefits become unsustainable when making an extra ten years of payments per average recipient.
Moreover, it is stunning how well the total compensation package for a teacher lined up with workers’ priorities of the day—job stability, a middle class lifestyle, and a secure retirement that one dared hope would have a long horizon. In fact, it makes me both frustrated and jealous for how much of all of those former pillars of the American Dream have evaporated, even from our lexicon of aspiration, just a generation later.
Where do we begin on the path to building a pension system that doesn’t further short-change Millennials?
I would argue we should start with a new set of givens. If job mobility is a given, how can a pension system work with rather than against that reality? If teachers need more cash earlier in their careers to get a foothold in the middle class, what are the implications for the overall structure of compensation? If those entering the classroom today will comfortably live into their 80s, what promises are we prepared to make now and keep through 2070?
I don’t have the answers and I’m saddened that almost any change to the pension system will result in a lesser package going forward. Perhaps that is the reason teachers have not been proactive in re-defining pensions and compensation more broadly. The data shows that this inaction is costing the profession. Since 2008 teachers in 21 states have found themselves with an increase in required contributions while facing reduced benefits, disproportionately affecting newer cohorts of teachers.
An immediate step must be to listen carefully to those early in their careers today. As a starting point, I offer the ideas of Jacob Pactor, a fifth-year teacher from Indianapolis:
Unions should help retain [newer] teachers by fixing voluntary retirement plans. Until I've taught for 15 years in my current district, I'm not vested in a retirement plan. That structure disincentivizes teachers of my generation from staying. Teachers should vest based on classroom performance. Unions can lead on this and incentivize effective teachers to stay by linking voluntary retirement plan contributions to classroom performance. This would encourage more effective teachers to stay in the classroom longer.
Teachers evaluated as highly effective should vest immediately with a higher percentage and with the opportunity for higher matching contributions. If McDonald's can do it with a "supersized 401(k) match" so can schools. Those matching contributions should be extended to all teachers, but at tiered levels: for example, highly effective teachers receive a five percent match of their pay, effective teachers receive three percent, and teachers deemed ineffective lose their district's matching opportunity until they improve.
I’m sure that Jacob’s words sound nothing like my dad’s would have in the early 1970s or today for that matter. Those generational tensions are natural and important to surface. My dad is all set. If we’re going to solve the pension crisis for the long term and in the best interest of teachers, more Millennials like Jacob need to enter the conversation.
Taxonomy:Welcome to teacherpensions.org, a new site designed to compile analysis and commentary on teacher pensions, provide information to help educators understand the impact of various pension proposals on their own finances, and use social media tools to help engage educators in the national conversation about teacher pensions. We intend the site to serve as a point of entry into the national conversation about teacher retirement sustainability and design and serve a variety of audiences, including teachers, policymakers, the media, and thought leaders.
We at teacherpensions.org have our own perspectives on the pension issue, but we respect that there are different ways of looking at this issue. To hear from those diverse voices, we invited a range of panelists—from union leaders to economists to teacher voice organizations—to participate in an online forum on teacher pensions. We asked each of them to respond to two main questions:
1. Is there a teacher pension crisis? If so, what exactly is the problem?
2. How do we ensure that teachers have secure, sustainable, and affordable retirements?
We’ve collected those responses and will be posting the authors’ contributions here, in their own words, on a rolling basis starting next week. Come back to read contributions from the National Education Association, TeachPlus, the Laura and John Arnold Foundation, and more.
To read each contributor's response, click on the following links:
Celine Coggins, Founder & CEO, TeachPlusDennis Van Roekel, President, National Education AssociationJosh B. McGee, Vice President of Public Accountability, The Laura and John Arnold FoundationDean Baker, Co-Director, Center for Economic and Policy ResearchElisabeth Evans, Founding CEO & Board Member, The VIVA ProjectHow much is the “average” teacher pension? That may sound like an easy question, but there are actually many different ways to answer it.
I’ll use Illinois to show why. Illinois lawmakers recently agreed to legislation that will change the way teacher pension benefits are calculated. In the process, news articles often cited the “average” teacher pension as justification for or against the changes. The Teachers’ Retirement System of the State of Illinois’ official estimate says the weighted average teacher pension in 2012 was $4,018 a month or $48,216 a year.* This estimate would be adequate to use if pension payments formed a normal distribution and there were no high or low outliers. In reality, pension averages tend to be skewed by a small number of large winners.
It's important to clarify that most teachers won't qualify for a pension in the first place. They simply won't stay teaching in their state long enough to qualify for a pension. Illinois estimates that only about 40 percent of beginning teachers will teach in the state for 10 years, the length of time now required to earn even a minimal pension. But, even for those that do qualify, there are many teachers who stay long enough to qualify for some minimal monthly payment but not long enough to reap the full rewards of the pension system. Depending on the state, teachers need to stay for 25-30 years in order to maximize benefits. Only a small minority last that long, but they’re rewarded with much higher pension payments, delivered monthly for the rest of their lives. Weighted averages hide all the teachers who leave before then.
In its Comprehensive Annual Financial Reports, Illinois publishes a table of the monthly pension payments received by all retirees, disaggregated by when the teacher retired and how many years they taught. The table lists average monthly payments for groups of retirees
,so, for example, users can see there were 1,370 teachers who retired between one and four years ago who had accumulated 10-14 years of experience. These ex-teachers received monthly payments of $1,282, or $15,384 per year.The data allow us to see the full range of payments. At the lower end, one retiree receives a monthly payment of only $83. Another seven receive only $123 a month. All of these teachers taught for less than five years and have been retired for more than 35 years. At the opposite end of the spectrum are a small group of recent retirees who taught for many years. Two teachers receive $13,223 a month, or almost $160,000 a year. A total of 30 retirees earn more than $100,000 a year in retirement payouts.
This data also allows us to look at the “average” teacher pension in many different ways.
For example, if you lined up all the different monthly payment amounts, the amount right in the middle would be $2,172. But that would ignore the number of people receiving each payment. If instead you lined up every retiree in order of their benefit, the teacher right in the middle would receive a monthly payment of $4,613, or a little more than $55,000 a year. Statisticians would call this the median payment.
If you wanted to know the most common payment, that would be $5,647 a month, an annual payment of almost $68,000. This is what’s known as the mode. 11,161 retirees fall into this group, or about one out of every nine retirees.
The next time you hear media coverage of Illinois’ or Detroit’s or California’s “average” teacher pension, take a step back and remember that you’re likely seeing the weighted average, and the weighted average hides meaningful differences. The median and the mode of pension payments are likely higher than the numbers you’re seeing reported in the news.
*Note: Illinois teachers do not participate in Social Security. For more information on what that means for individuals and for the state, see here.
Taxonomy:Welcome! Thanks for visiting TeacherPensions.org, a new website covering the latest information on teacher pensions. While you’re here, please take a look at our collected resources on a variety of topics, ranging from politics to legal issues to alternative retirement models. We intend the site to be an entry point for experts and non-experts seeking to learn more about educator pensions, and we’ll be expanding the archives over time and featuring new work as it comes out. Check back often--we'll be regularly updating the site with new analysis and content.
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Today, we believe there is a need for high-quality information and analysis to help stakeholders – especially teachers and policymakers – understand the teacher pension issue and the trade-offs among various options for reform. We believe the teacher pension issue has not yet gained sufficient attention nationally, despite its seriousness and immediacy. We aim to make the issues around teacher pensions more accessible and relevant to the general public, more compelling to policymakers, and more understandable for current and future teachers.
Again, thanks for visiting, and we hope you’ll make this site a regular stop.