The state should ensure that pension systems are portable, flexible and fair to all teachers.
Arizona only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is not fully portable, as the state eliminated the ability to withdraw employer contributions for teachers who choose to withdraw their account balances when leaving the system who were hired after July 1, 2011. It also limits flexibility by restricting the ability to purchase years of service. However, the state is commended for offering immediate vesting and a fully portable supplemental savings plan.
Teachers in Arizona also participate in Social Security, so they must contribute to the state's defined benefit plan in addition to Social Security. Although retirement savings in addition to Social Security are good and necessary for most individuals, the state's policy results in mandated contributions to two inflexible plans, rather than permitting teachers options for their state-provided savings plans.
Vesting in a defined benefit plan guarantees a teacher's eligibility to receive lifetime monthly benefit payments at retirement age. Non-vested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Arizona is commended for allowing immediate vesting.
Arizona, however, eliminated an important portability provision for new teachers hired after July 1, 2011. Teachers terminated due to Employer Reduction in Force or position eliminations are exempt. Employees hired prior to that date are allowed to withdraw an employer match on contributions made prior to July 1, 2011, which is rare among defined benefit plans. Arizona teachers with five years of experience who do not want to receive monthly payments at retirement age are allowed to withdraw their contributions and a 25 percent employer match, plus interest. The amount of employer match increases by 15 percent for each year of additional service, reaching 100 percent at 10 years of service. While ideally teachers would be entitled to their full employer contribution at time of vesting, Arizona's scale was moving in the right direction. There is no match, even for these teachers, on contributions made after July 1, 2011.
Now, new hires and those teachers that retire with less than five years of experience accrue no benefits beyond what they might have earned had they simply put their contributions in basic savings accounts. Further, teachers who remain in the field of education but enter another pension plan (such as in another state) will find it difficult to purchase the time equivalent to their prior employment in the new system because they are not entitled to any employer contribution.
Arizona also recently changed important flexibility provisions, placing limits on teachers' purchase of years of service. The ability to purchase time is important because defined benefit plans' retirement eligibility and benefit payments are often tied to the number of years a teacher has worked. While the state is commended for allowing teachers to purchase time for previous teaching experience and approved leaves of absence, teachers may not initiate this purchase until they have 5 years of service in Arizona, which makes the purchase cost much more expensive than if calculated earlier in a teacher's career. The state is commended for enacting legislation in 2012 which reduced this requirement from 10 years to 5 years. While the ability to purchase time is valuable to any teacher who enters the system with previous service or needs to take a leave for personal reasons such as maternity or paternity care, the required wait may make the purchase price too expensive for teachers to take advantage of the provision. Additionally, as of July 20, 2011, teachers are limited to purchasing no more than 5 years per type of purchase. These restrictions do not apply to teachers purchasing previously forfeited service in the retirement system.
Arizona is commended for offering the Supplemental Retirement Savings Plan (SRSP), a qualified 401a defined contribution plan. The SRSP is optional and allows teachers to contribute income before taxes to retirement accounts. Unlike other supplemental plans, the SRSP has unique restrictions placed on it by the IRS. Teachers only have a two-year window to decide whether to participate, and their decisions are final. Decisions about the manner and amount of participation cannot be changed, and account balances must be distributed upon retirement. Teachers may elect to defer up to 100 percent of pay or $51,000, whichever is lower. Also, employers must choose to join the SRSP, so participation by all local districts is not guaranteed.
Teachers may also have the option of participating in a Supplemental Salary Deferral Plan (SSDP), a 403b or 457, if their employer chooses to participate. The SSDP is more flexible and has fewer restrictions than the SRSP.
Arizona State Retirement System, Actuarial valuation Report as of June 30, 2015. Aldeman, C. and Rotherham, A. (2014). Friends without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security, Bellwether Education Partners.
Offer teachers a pension plan that is fully portable, flexible and fair.
Arizona should offer teachers for their mandatory pension plan the option of either a defined contribution plan or a fully portable defined benefit plan, such as a cash balance plan. A well-structured defined benefit plan could be a suitable option among multiple plans. However, as the sole option, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because teachers in Arizona participate in Social Security, they are required to contribute to two defined benefit-style plans.
Increase the portability of its defined benefit plan.
If Arizona maintains its defined benefit plan, it should return to its previous policy of allowing teachers leaving the system to withdraw employer matching contributions. The state should also allow teachers to purchase previous teaching experience on the first day of employment and to purchase approved leaves of absence. A lack of portability is a disincentive to an increasingly mobile teaching force.
Offer an employer contribution to the supplemental retirement savings plan.
While Arizona at least offers teachers the option of a supplemental defined contribution savings plan, this option would be more meaningful if the state required employers also to contribute.
Arizona did not respond to repeated requests to review this analysis.
Anachronistic features of teacher pension plans disadvantage teachers early in their careers. 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. To achieve the maximum benefits from such a plan, a teacher must begin and end his or her career in the same pension system. Teachers who leave before vesting—which takes as long as 10 years in some states—are generally entitled to nothing more than their own contributions plus some interest. This approach may well serve as a retention strategy for some, but on a larger scale it fails to reflect the realities of the current workforce. At present, the United States is experiencing growth in school-age populations in some states, while other states are experiencing a decline. The nation's workforce needs to be able to respond to these changes. The current workforce is increasingly mobile, with most entering the workforce expecting to change jobs many times. All workers, including teachers, may move to jobs in other states with no intention of changing careers. To younger teachers in particular, a defined benefit plan may seem like a meaningless part of the compensation package and thus fail to attract young talent to the profession. A pension plan that cannot move across state lines and that requires a long-term commitment may not seem like much of a benefit at all.
There are alternatives. Defined contribution plans are fair to all teachers at all points in their careers. These plans are more equitable because each teacher's benefits are funded by his or her own contributions plus contributions from the employer specifically on the individual employee's behalf. This is fundamentally more equitable than defined benefit plans, which are generally structured to require new teachers to fund the benefits of retirees. Moreover, defined contribution plans are inherently portable and give employees flexibility and control over their retirement savings. However, it must be noted that defined benefit plans can also be portable and fair, so long as they are structured as cash balance plans or plans that permit the withdrawal of employer contributions.