Education Funding

Should Lawmakers Change Pension Plans to Help New Teachers?

By Andrew Ujifusa — July 07, 2015 4 min read
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To what extent have lawmakers altered teacher retirement systems in recent years in ways that unfairly impact new teachers?

In “Eating Their Young: How Cuts to State Pension Plans Fall on New Workers” Chad Aldeman and Leslie Kan of Bellwether Education Partners, a Washington consulting firm, try to provide answers to that question. They examine trends in various factors that impact the level of benefits and when teachers can obtain them. They also make one broad point: The systems should be changed to give teachers more power over their retirement and to make the systems more attractive and fair to new teachers in particular.

First, let’s look at four variables affecting state retirement systems that get highlighted in the report. Vesting years represents the number of years teachers must work before receiving the minimum pension benefits. The benefit formula multiplier applies to the years of service—the higher the multiplier, the higher the total retirement benefit. Normal retirement age is the minimum age for when teachers can collect retirement benefits. And the contribution rate represents the share of teachers’ salaries going to their retirement benefits.

Below, you can see how those variables have trended over the 30-year period from 1982 to 2012, according to the report, which in turn drew on data collected by the Wisconsin legislature:

But the impact of those and other changes, in particular those that reduce retirement benefits, don’t fall on all teachers equally, Aldeman (an associate partner at Bellwether) and Kan (a pensions analyst) say. “When states reduce pension benefits, those cuts disproportionately fall on new and future teachers. While benefit increases tend to apply to all workers, benefit decreases typically only affect new workers,” the report states. And the reductions in overall benefits, not surprisingly, have spiked since the Great Recession—since 2008, the report says, more than 20 states increased the minimum retirement age for teachers.

From 1982 to 2012, the average retirement benefit for teachers with 10 years of service has dropped significantly. A teacher hired in 1982 would on average accrue benefits worth about $16,400 after 10 years service, while a teacher hired in 2012 would after a decade of work accrue benefits worth only about $12,000, a decline of 27 percent (the figures are adjusted for inflation). There’s been a decline for teachers with 20 years of service as well, but by a much small percentage. And there’s been an increase for teachers with 35 years of service over those three decades.

Over several decades, teachers hired in 2012 can expect to see tens of thousands of dollars less in benefits than teachers hired in 1982, according to the report.

Teachers’ benefits don’t have to be tied to “how long they’ve been with their employer,” Aldeman told me in an interview, adding that current systems also don’t make much sense because, among other things, “We have state legislators choosing when the best time for teachers to retire is.”

So what are possible changes to fix this structural inequity in retirement plans? Aldeman told me that it would be helpful for retirement systems to create more decision points along teachers’ career trajectory that allow them more options and control over their retirement, while decreasing the overall importance of years in service.

For example, he said, teachers could choose to invest in cash-balance accounts that provide a more linear increase of retirement benefits, instead of using traditional pension plans that often take many years to begin providing exponential growth in benefits.

It’s worth noting that this push to overhaul teacher retirement plans has been underway for some time. For example, Chalkbeat Colorado reported on an event hosted by the Colorado Pension Project last year at which representatives from Bellwether, along with TNTP (then called The New Teacher Project) and the National Council on Teacher Quality, argued that the state’s retirement system needed an overhaul. In a 2012 report, NCTQ made a similar point when, in an analysis of recent changes to teacher retirement systems, the group found for the most part that “states are making up their pension shortfall on the backs of their teachers, especially new teachers.”

The Colorado Pension Project itself has come under scrutiny for its broader motives. In a Denver Post column last year, John MacPherson, a Colorado Coalition for Retirement Security board member, blasted the Colorado Pension Project for, among other things, trying to upend a state retirement system that he said had strong returns and low fees. MacPherson also takes on the various groups at the Pension Project event for their links to the Laura and John Arnold Foundation, which he criticizes for trying to cut pension systems for teachers.

Aldeman said state legislators, having created inflexible systems that they must patch up when economic times get tough, should be getting the major flak from those concern about retirement benefit systems’ health and fairness, not teachers.

“In most states, they’ve been the ones that have been the most regular contributors,” Aldeman said of teachers.

Read the full Bellwether report.

A version of this news article first appeared in the State EdWatch blog.