When they signed-up, teachers were promised a pension when they retire. It was part of the deal. But since states have long-ignored their fiscal obligations, pension funds carry significant unfunded liabilities, threatening their ability to fund teachers’ retirement. It makes sense that teachers, and particularly their unions, want to fight back.
But is fighting to protect the existing pension plans in perpetuity the right thing to do?
On Saturday at the National Education Association’s (NEA) Leadership Summit, John Jensen, the Vice President of the Retired Executive Council of the NEA, will lead a break-out session on the “bogus” research attacking teacher pensions and how to defend against it. And in the interest of transparency, we, as well as The Laura and John Arnold Foundation (one of our funders), are among Jensen’s list of “faux researchers.”
If his presentation at the Summit last year is any indication, this session will deal less with research and more with ad hominem attacks. But ignoring the evidence will only serve to harm the very teachers he seeks to protect.
There is considerable and growing evidence that 1) at least half of teachers today will not qualify for even a minimum state pension benefit; 2) state pension funds now carry roughly $500 billion in debt and are eating up larger and larger shares of teacher compensation; 3) most teachers would have a more valuable retirement if they participated in a traditional 401k plan; and, 4) today’s teachers, to their own financial detriment, subsidize the pension of currently retired teachers.
Let’s tackle these issues one at a time.
- Nowadays teachers do not spend the whole of their professional lives in schools. In fact, the most common years’ of experience for teachers nationally is around 5 years. This has serious retirement implications. Since the majority of state pension plans have overwhelming amounts of debt, states have raised their vesting periods as a cost savings measure. All of this means that at least half of new teachers will not ever receive a pension. And, when they do leave the classroom it is only with their own contributions (often earning very little interest), and many teachers don’t even earn Social Security during their tenure.
- States are crippled with teacher pension debt. To be clear, this is not teachers’ fault. Rather, states didn’t make sufficient investments and the funds often had lackluster returns. As a result, districts on average now spend $2,500 on employee benefits. And pensions alone comprise over $1,000 of that. This means that – baring a huge reform – teachers today are paying for the pension of current retirees even though they themselves will likely never receive a pension anywhere near as generous when they retire.
- Since most teachers won’t teach for their entire career, a defined contribution plan such as a 401k or 403b would actually produce a more valuable retirement benefit. Due in part to cross-generation subsidization, it takes a 25-year-old teacher decades before her pension is more valuable than her own contributions, or what she could have earned from a DC plan. Pension plans are designed to convey valuable benefits on people who stay in their careers for thirty years or more. And they do. But, they do so at the expense of the majority of teachers.
- Pension funds work kind of like insurance, where one group subsidizes the other. In the case of teacher pensions, the contributions of short-term teachers’ pay for the retirement of longer-term ones. This would be ok if all teachers taught long enough to reach the point when their pension is sufficiently valuable. But that isn’t the case. Instead, short-term teachers incur significant financial losses to pay for pensions that they will never receive. A recent analysis of the massive pension fund in California (CalSTRS), reveals that roughly two-thirds of California’s teachers are pension “losers” because of this. Additionally, newer teachers have the burden of paying for past pension debts.
Despite what the NEA says publicly, the fact is teacher pension systems are in need of reform to better meet teachers’ retirement needs. Shifting to provide new teachers with the option of investing in a 401k for their retirement won’t solve all of the teacher pension woes. The question remains of how will states pay for their existing pension obligations. That will likely take a lot of innovative thinking and some difficult sacrifices from taxpayers, and likely teachers themselves. But to be sure, new teachers shouldn’t have to shoulder the pension costs of retired teachers, particularly when the funds may not be around to support them when they leave the classroom.