'Early Out' Option Could Strain Pension Systems

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By the end of the year, Illinois officials expect, more than 12,000 educators--about 10 percent of the school workforce--will have left their jobs as a result of state early-retirement incentives.

The "early out'' program will save the state millions of dollars in salary costs. But its success has left some analysts wondering what will happen to the state teacher-pension system a few years down the road.

It is a problem that a number of states are facing or could face in the next few years. About a dozen states have offered incentives for early retirement over the last few years, according to the National Education Association.

The programs are adding to the strain that the "graying'' of the teacher workforce could place on state public-pension systems. Over the next 10 years, nearly one million of the nation's teachers--whose average age is 44--are expected to reach retirement age.

The result is that some states could risk overdrawing their pension funds, according to the U.S. General Accounting Office.

At the same time, some educators still fear that pension systems will be raided by states looking for ways to stretch their budgets. (See Education Week, Nov. 7, 1990.)

"Teacher-pension funds are already under a great deal of strain,'' remarked Laurie Westley, the chief legislative counsel for the National School Boards Association. "These are just different pulls on the same funds.''

'Five Plus Five'

Early-retirement packages give cash-strapped school districts the opportunity to save money by replacing expensive veteran teachers with lower-paid novices.
Because most school budgets allocate 80 percent of their resources to payroll, successful early-out plans can translate into substantial savings for districts.

The school district, county, or state unit of government in most states is required to make a regular contribution to the retirement system based on a percentage of the salaries of employees. But some states, such as New Jersey, also pay the employer's share for all certified school employees in the teacher-pension system.

Generally, early-retirement packages add about five years to a teacher's age and experience when calculating benefits.

In response to "Five Plus Five,'' the Illinois early-retirement program, a record number of teachers and administrators is expected to leave this year, said Robert Daniels, the executive director of the Illinois Teachers Retirement System.

Under the two-year program, which expired this month, teachers can retire with benefits equal to what they would have earned with five more years of service.

In addition to the 8,000 employees in the program this year, about 4,500 educators took advantage of the retirement window last year.

Annual pension benefits can range from $10,000 to $50,000.

While the plan should create front-end savings for the schools, officials said they fear the exodus will take a toll on the anemic state teacher-pension fund.

Illinois is one of a number of states with an underfunded teacher-retirement system. Maine, Oklahoma, West Virginia, and the District of Columbia have also been cited for underfunding by the G.A.O.

"The state now owes the system $8.6 billion,'' Mr. Daniels said. "The problem is, if we keep going on that way, by the year 2014 the system's going to be bankrupt.''

'Shortchanging the System'

Although New Jersey's teacher-pension fund is healthy, Commissioner of Education Leo Klagholz warned school districts last month that a rise in teacher-pension demands could trigger a crackdown on education aid to districts.

With more teachers retiring as a result of early buy-outs in recent years, and benefit increases due to salary gains in the 1980's, Mr. Klagholz said, the state will have to cut expenses.

In the budget proposal presented by Gov. Christine Todd Whitman last week, teachers would be required to increase their contributions to the pension fund from 4 percent to 6 percent of salary.

Benefits paid by the state teacher-pension fund could increase by as much as $200 million this year--about 10 times the annual average increase in recent years.

"That's an increase in the state budget over which the state has no control,'' said Robert Davis, the assistant commissioner of education for administration and finance.

In Massachusetts, an average of 1,800 teachers retire each year. An additional 800 opted for an early-retirement plan last year, said Peter Hapgood, the deputy executive director of the Massachusetts Teachers Retirement Board, and even more are expected to participate this year.

Although the legislature provided an additional $20 million for each of the two years to cover the early retirements, the pension fund is still seriously underfunded.

Mr. Hapgood said the system is about 50 percent solvent, which means that it has only half the resources needed to pay out benefits projected in the future. But the state is gradually increasing the funding percentage, he noted.

In Pennsylvania, 12,000 teachers took advantage of an early-retirement plan that ended last year.

Although the state teacher-pension system is relatively strong--at 87 percent, the funding percentage is much higher than in many other states--some education officials still worry that the system will eventually take a hit.

Thomas J. Gentzel, the assistant executive director of the Pennsylvania School Boards Association, said legislators have been pressuring the state retirement board to cut the state contribution to the system.

That could mean "shortchanging the system now, only to have to pay for it later,'' he warned.

Vol. 13, Issue 26

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