Budget & Finance

The Bleak Outlook for Teacher Pensions: What You Need to Know

By Mark Lieberman — January 11, 2023 3 min read
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Funding for school employees’ pension plans last year fell even further behind obligations than in previous years, a new report shows. But the range of the gaps among states is vast, with plans in some states performing well and others lagging substantially.

Unfunded pension liabilities arise when money in the pension bank account falls short of what the fund has committed to paying the employees who access it.

For K-12 pension plans, unfunded liabilities topped $816 billion in 2022, according to figures prepared for Education Week by the nonprofit Equable Institute, which researches public pensions and advocates for improving them. That figure exceeds the annual amount America collectively spends each year on K-12 public education.

Equable’s new annual report outlining the dismal state of funding for public pensions, including for school employees, was published on Tuesday.

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Nationwide, teacher pension plans were 75.7 percent fully funded in 2022, according to Equable data—marking a drop of more than 8 percentage points from last year, when a surging post-pandemic economy brought unexpectedly robust returns.

That doesn’t bode well for the future, said Anthony Randazzo, the executive director of Equable. Pension returns are highly volatile and rarely adhere to a predictable upward curve. A potential recession, and the oncoming expiration of the federal COVID relief funds that have helped keep many districts afloat during the pandemic, could create even steeper financial pressures on K-12 pensions in the coming years, he said.

States and school districts will continue to shoulder the heavy financial burden of bankrolling retirement plans for public school employees and paying off debt servicing on underfunded plans.

Those obligations strain tight district budgets, with some devoting nearly 30 percent of payroll to pension obligations.

Unfunded pension liabilities also squeeze states’ capacity for other education investments, like raising staff salaries and developing tutoring programs.

Across all public pension programs, including those for other public employees like firefighters and police officers, slightly more than 77 percent of obligations nationwide were funded in 2022, according to the Equable report. That’s a drop of more than 6.5 percent from 2021.

In 2021, unfunded liabilities for all public pensions dropped below $1 trillion. Thanks to deteriorating financial conditions, pension plans weren’t so fortunate last year, as that figure jumped to $1.45 trillion.

Unfunded liabilities compound district debt

Even though investment returns for school pension plans slightly outperformed returns for other kinds of pension plans, the resulting windfall wasn’t enough to offset substantial liabilities, Randazzo said.

More unfunded liabilities translate to more debt, compounding the financial hole pension plans are creating.

The funding level for pensions varies quite a bit from state to state. In two states and the District of Columbia, public pensions—the majority of which are for school employees—are funded at more than 100 percent of existing liabilities. In 20 more states, public pensions are 80 percent funded or better.

But in six states—Connecticut, Illinois, Kentucky, Mississippi, New Jersey, and South Carolina—pensions are funded between 47 percent and 59 percent.

Even in some states where public pension funding looks strong, teacher pensions are suffering relative to pensions for other public-serving workers. In California, for instance, 98 percent of pension obligations for Los Angeles fire and police employees are currently funded, compared with only 70 percent of pension obligations for the statewide teacher=pension plan.

Three pension plans that cover teachers are among the 15 lowest-funded public pension plans in the nation, according to the report’s rankings:

  • Chicago Teachers Fund: 45 percent funded; $14 billion in unfunded liabilities
  • New Jersey Teachers Pension Annuity: 37 percent funded; $47 billion in unfunded liabilities
  • Indiana Teachers Pre-96 Plan: 28 percent funded; $10 billion in unfunded liabilities

Meanwhile, pension plans for educators in Michigan, Nebraska, New York City, and Tennessee, ranked among the 10 best-funded public pensions in the nation. All three are fully funded—and then some.

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