In a new Washington Post op-ed, Andrew Rotherham and I argue that the popular perception of teacher pensions is wrong. The media often portray public sector pensions as gold-plated benefits for all public workers. That has elements of truth but is a misdiagnosis of a larger problem, which is that pensions work well for the small fraction of teachers who stay in one plan for their entire career, but many more will leave their service as teachers with very little in the way of retirement savings. The real story is one of a small number of relatively big winners and a much larger group of losers.
This doesn’t fit with the common perception, but, in fact, many teachers get worse benefits than those offered in the private sector. This is most prominent for early-career workers. Under a federal law known as the Employee Retirement Income Security Act (ERISA), private-sector employees must be eligible to retain some portion of their employer’s retirement contributions once they’ve been employed for three years and 100 percent of their employer’s contribution within six years.
One commenter on our piece asked if ERISA applied to public sector plans like those for teachers. The answer is no, ERISA's rules on pension accounting and retirement benefits apply only to private-sector employers. In fact, 17 states, including Maryland, Illinois, Michigan and New York, withhold all employer contributions for teachers until 10 years of service. States can and do offer worse benefits than those allowed in the private sector.
There is never enough space in an op-ed to address all dimensions of a complicated problem, but this story is part of a broader trend. While ERISA has gradually forced private plans to become more and more generous to early-career workers, public sector plans are moving in the opposite direction. ERISA’s original rules required private sector plans to make a portion of employer contributions available to employees within at least 10 years and all employer contributions within 15 years. In the late 1980s, Congress tightened those rules so that employees were eligible for employer contributions sooner. Starting in 2002, employers were required to offer their employees those contributions even sooner—some share of employer contributions within three years and 100 percent of them within six years. In addition, private companies have quietly adopted features like automatic enrollment and life-cycle funds that improve retirement offerings for private-sector workers.
The public sector is going in reverse. During the recent recession, twelve states lengthened their vesting period, the time a teacher must be employed before becoming eligible for pension benefits. They’ve also created less-generous plans for new employees. New York, for example, has six tiers in its defined benefit pension plan. The most experienced teachers are in Tier I. They have the most generous benefits. Teachers hired in the next tier are slightly worse off, and so on, until Tier VI, the plan offered to new teachers today. Nearly every state has its own tiers like this where new workers subsidize the costs of more expensive retirement plans for retirees and older workers.
As we conclude in our piece, this is part of a broader trend to get costs under control for public sector pensions. But “throwing up obstacles and making the plans stingier ignores the main purpose of retirement plans in the first place: to offer all workers a path to an attractive and secure retirement.” Read our entire piece here.