Pension Sustainability

2013 Pensions Policy

2013 Goals for Pension Sustainability

Best practices

According to the most recent financial data published by states' teacher (or public employee) pension systems, there are just two states reporting that their systems are more than 95 percent funded: Washington and Wisconsin. What is clear is that most states' pension systems are in a financial crisis. An uptick in the economy may ameliorate some of the more immediate concerns, but sustainability won't be achieved by tinkering with vesting periods or shaving down benefits to teachers, the path most states have taken to date. Real solutions require comprehensive rethinking of how retirement benefits are provided to teachers. 

Research rationale

Many states' pension systems are based on promises they cannot afford to keep.

Teacher salaries are just one part of the compensation package that teachers receive. Virtually all teachers are also entitled to a pension, which, upon vesting, provides compensation for after retirement. In an era when retirement benefits have been shrinking across industries and professions, teachers' generous pensions remain fixed. In fact, nearly all states continue to provide teachers with a defined-benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers.

Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices. Without reform, these systems are a house of cards, vulnerable to collapse as funding cannot keep up with promised benefits. And it is taxpayers who will have to pay if it all tumbles down.

Pension plans disadvantage teachers early in their careers by overcommitting employer resources to retirement benefits.

The contribution of employers to their workers' retirement benefits is a valuable benefit, important to ensuring that individuals have sufficient retirement savings. Compensation resources, however, are not unlimited, and they must fund both current salaries and future retirement benefits. Mandated employer contributions to many states' teacher pension systems are extremely high, leaving districts with little flexibility to be more innovative with their compensation strategies. This is further exacerbated for states in which teachers also participate in Social Security, requiring the district to pay even more toward teacher retirement. While retirement savings in addition to Social Security are necessary, states are mandating contributions to two inflexible plans rather than permitting options for teachers or their employing districts.

This approach to compensation disadvantages teachers early in their careers, as the commitment of resources to retirement benefits almost certainly depresses salaries and prevents incentives. Lower mandatory employer contribution rates (in states where they are too high) would free up compensation resources to implement the kinds of strategies suggested elsewhere in the Yearbook. In addition, some states require high employee contributions, with these contributions continuing to rise. The impact this has on teachers' paychecks may affect retention, especially early in teachers' careers.

Pension Sustainability: Supporting Research 

NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see R. Costrell and M. Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute, Policy Brief, February 2011.

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see J. Furgeson, R. Strauss, and W. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy, Volume 1, No. 3, Summer 2006, pp. 316-348.

For examples of how teacher pension systems inhibit teacher mobility, see R. Costrell and M. Podgursky, "Golden Handcuffs," Education Next, Volume 10, No. 1, Winter 2010, pp. 60-66.

For additional information on state pension systems, see S. Loeb and L. Miller. "A Review of State Teacher Policies: What Are They, What Are Their Effects, and What Are Their Implications for School Finance?" Stanford University: Institute for Research on Education Policy and Practice, December 2006; and J. Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development, May 2008.

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group, Inc., 2010.