The state should ensure that pension systems are portable, flexible and fair to all teachers.
California only offers a defined benefit pension plan (with a small cash balance component) to its teachers as their mandatory pension plan. This plan is not fully portable, does not vest until five years, and does not provide any employer contribution for teachers who choose to withdraw their account balances when leaving the system. California is commended, however, for increasing flexibility by allowing the purchase of service and for offering a fully portable supplemental savings plan.
Teachers hired on or after January 1, 2013 automatically enroll in the "2% at 62" Plan. This new plan offers a lower level of retirement benefits than the older plans. California's retirement plan is technically a hybrid plan composed of a defined benefit component (DB) and a minor cash balance component, known as the Defined Benefit Supplement Program (DBS), which started in 2001 and was created primarily for part-time employees. The state, however, terminated the vast majority of funding to DBS as of January 1, 2011. From 2001 to 2010, California teachers' mandatory contribution rate of 8 percent was divided with 6 percent going to the DB plan and 2 percent going to DBS. Eight percent of any extra compensation (e.g. summer school, coaching) was also co
ntributed to DBS. As of January 1, 2011, however, the full contribution (which is currently 9.205 percent effective July 1, 2016) will only fund the DB plan. Contributions in excess of one service year credit are the only funds that will continue to go to DBS.
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. California's vesting at five years of service limits the options of many teachers who leave the system prior to this point. According to a recent report, about 69 percent of employees in California's teacher-covered pension plan vest, meaning that 31 percent do not become eligible for a pension and, therefore, can only collect their refundable contributions plus any balances in their cash balance accounts.
Teachers who withdraw their funds when they stop teaching in California only receive their own contributions plus interest. This means that teachers who withdraw their funds accrue no benefits beyond what they might have earned had they simply put their contributions in basic savings accounts. Therefore, teachers leaving the pension system would have saved only 8 percent of their salary plus interest (see pension neutrality goal), which is significantly below the level conventionally recommended by retirement advisers for individuals not also contributing to Social Security.
While California's relatively low mandatory contribution rate allows for flexibility in teachers' retirement savings, it also means that California needs to educate teachers on what happens if they leave the system and encourage savings in other portable supplemental plans. Furthermore, 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 part of the employer contribution.
California increases the flexibility of its defined benefit plan by allowing teachers to purchase 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. California's plan allows teachers to purchase time for all previous teaching experience. The state's plan also allows teachers to purchase time for approved leaves of absence, including maternity and paternity leave for up to two years per leave, and for leave covered by the Family and Medical Leave Act, up to 12 weeks per leave.
California is commended for offering optional supplementary defined contribution plans, known as Pension2. Teachers may enroll in 403(b), 457 and Roth 403(b) plans. The state maintains an informational website to provide teachers with the choices that are available to them and allows them to compare products prior to participating in a particular plan. There is no employer contribution to these accounts, however.
The California State Teachers' Retirement System, 2015 Member Handbook, revised January 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.
California 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. As the sole option, however, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because teachers in California do not participate in Social Security, they have no fully portable retirement benefits that would move with them in the event they leave the system. Its DBS component is similar to a defined contribution plan and could be fully portable if the state reinstituted meaningful funding to these accounts.
Increase the portability of its defined benefit plan.
If California maintains its defined benefit plan, it should reinstate funding the cash balance component and allow teachers that leave the system to withdraw employer matching contributions. The state should lower the vesting requirement to three years. A lack of portability is a disincentive to an increasingly mobile teaching force.
Offer an employer contribution to the supplemental retirement savings plan.
While California 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.
California was helpful in providing information that enhanced 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.