Pension Flexibility: District of Columbia

2011 Retaining Effective Teachers Policy

Goal

The state should ensure that pension systems are portable, flexible and fair to all teachers.

Meets a small part
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Flexibility: District of Columbia results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/DC-Pension-Flexibility-9

Analysis of District of Columbia's policies

The District of Columbia only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is not fully portable, does not vest until year five and does not provide any employer contribution for teachers who choose to withdraw their account balances when leaving the system. It also limits flexibility by restricting the ability to purchase years of service. 

Vesting in a defined benefit plan guarantees a teacher's eligibility to receive lifetime monthly benefit payments at retirement age. Nonvested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. The District's vesting at five years of service limits the options of teachers who leave the system prior to this point.

Teachers who withdraw their funds when they stop teaching in the District only receive their own contributions. This means that teachers who withdraw their funds accrue fewer benefits than what they might have earned had they simply put their contributions in basic savings accounts that earned interest. Therefore, teachers leaving the pension system would have saved only 8 percent of their salary (see Goal 4-H), which is significantly below the level conventionally recommended by retirement advisers for individuals not also contributing to Social Security.

While the District's relatively low mandatory contribution rate allows for flexibility in teachers' retirement savings, it also means that there is a need to educate teachers on what happens if they leave the system and encourage savings in other portable supplemental plans. 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.

The District limits teachers' flexibility 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. The District's plan allows teachers to purchase time for previous teaching experience, up to 10 years. While better than not allowing any purchase at all, this provision disadvantages teachers who move to the District with more teaching experience. In addition, this purchase is not allowed until teachers have five years of service in the District, which makes the purchase cost much more expensive than if calculated earlier in a teacher's career. Its plan also allows teachers to be credited for up to six months of approved leave without pay for each fiscal year, as long as teachers make the mandatory contributions to the system. However, maternity/paternity leave is not specifically listed as an approved leave of absence. 

The District is commended for offering an optional supplementary savings option. Teachers may contribute an additional 10 percent of their base salary each pay day on an after-tax basis in increments of 25 dollars.

Citation

Recommendations for District of Columbia

Offer teachers a pension plan that is fully portable, flexible and fair.
The District of Columbia 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 the District 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.

Increase the portability of its defined benefit plan.
If the District of Columbia maintains its defined benefit plan, it should allow teachers that leave the system to withdraw their contributions plus accrued interest, as well as an employer match. The District should also allow teachers to purchase their full amount of previous teaching experience upon the first day of employment, explicitly allow the purchase of paternal leave and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.

Offer an employer contribution to the supplemental retirement savings plan.
While the District of Columbia at least offers teachers the option of a supplemental defined contribution savings plan, this option would be more meaningful employers were required also to contribute and if there were multiple investment options. 

State response to our analysis

The District of Columbia Retirement Board did not respond to repeated requests to review NCTQ's analyses related to teacher pensions.

How we graded

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 is as much 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 an explosion 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. It must also be noted that defined benefit plans can be portable and fair, if structured as cash balance plans or plans that permit the withdrawal of employer contributions.

Research rationale

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 Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "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 (2006); and Janet 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 (2010).