Pension Neutrality: Georgia

2011 Retaining Effective Teachers Policy

Goal

The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.

Meets in part
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Neutrality: Georgia results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/GA-Pension-Neutrality-9

Analysis of Georgia's policies

Georgia's pension system is based on a benefit formula that is not neutral, meaning that each year of work does not accrue pension wealth in a uniform way until teachers reach conventional retirement age, such as that associated with Social Security.

Teachers' retirement wealth is determined by their monthly payments and the length of time they expect to receive those payments. Monthly payments are usually calculated as final average salary multiplied by years of service multiplied by a set multiplier (such as 1.5). Higher salary, more years of service or a greater multiplier increases monthly payments and results in greater pension wealth. Earlier retirement eligibility with unreduced benefits also increases pension wealth, because more payments will be received.

To qualify as neutral, a pension formula must utilize a constant benefit multiplier and an eligibility timetable based solely on age, rather than years of service. Basing eligibility for retirement on years of service creates unnecessary and often unfair peaks in pension wealth, while allowing unreduced retirement at a young age creates incentives to retire early. Plans that change their multipliers for various years of service do not value each year of teaching equally. Therefore, plans with a constant multiplier and that base retirement on an age in line with Social Security are likely to create the most uniform accrual of wealth.

Georgia's pension plan is commended for utilizing a constant benefit multiplier of 2 percent; however, teachers may retire before standard retirement age based on years of service without a reduction in benefits. Teachers with 30 years of service may retire at any age, while other vested teachers with less than 30 years of service may not retire until age 60. Therefore, teachers who begin their careers at age 22 can reach 30 years of service by age 52, entitling them to eight additional years of unreduced retirement benefits beyond what other teachers would receive who may not retire until age 60. Not only are they being paid unreduced benefits by the state well before Social Security's retirement age, but these provisions, along with the state's early retirement with reduced benefits based on years of service, may also encourage effective teachers to retire early. They also fail to treat equally those teachers who enter the system at a later age and give the same amount of service.

Citation

Recommendations for Georgia

End retirement eligibility based on years of service.
Georgia should change its practice of allowing teachers with 30 years of service to retire at any age with full benefits. If retirement at an earlier age is offered to some teachers, benefits should be reduced accordingly to compensate for the longer duration they will be awarded.

Align eligibility for retirement with unreduced benefits with Social Security retirement age.
Georgia allows all teachers to retire before conventional retirement age, some as young as 52. As life expectancies continue to increase, teachers may draw out of the system for many more years than they contributed. This is not compatible with a financially sustainable system (see Goal 4-H).

State response to our analysis

Georgia asserted that NCTQ appears to be advocating the establishment of a mandatory retirement age that aligns with Social Security eligibility.  The state asked: "During a person's working career, they are paid based on their responsibilities, experience, performance and credentials.  Why would you treat them differently in retirement by not basing their retirement on their years of service, but instead basing it on their age?"

Georgia continued: "It is ironic that the NCTQ concludes that a defined benefit plan treats its plan members differently by basing their benefits partially on years of service. Historically, the NCTQ has championed defined contribution plans as the preferred plan of retirement for teachers. This type of plan by design discriminates against women.  All things being equal (age, salary, and years of service) between a male and a female teacher, the balance in their defined contribution account will be the same regardless of when they retire. This would meet the NCTQ's desire of neutrality, except for one fact.  Women, on average, outlive men by at least three to five years which means that either they will deplete their defined contribution account and have no income for the last three to five years of their lives or they will have to live with less money than their male counterpart so their funds will last them longer until they die."

The state concluded that although the statement that a teacher can retire as early as the age of 52 is true, it is extremely misleading.  In Georgia, the average age of teachers retiring with at least 25 years of service is 59, and the average age of teachers retiring with 10 to 25 years of service is 63.

Last word

NCTQ maintains that eligibility for retirement should be based on age.  The retirement benefit formula may include years of service and final average salary as they represent compensation for a person's "responsibilities, experience, performance and credentials." However, when years of service is contained in eligibility requirements, teachers that entered teaching earlier in life will reach retirement eligibility based on years of service earlier than those who started later in life.  Their pensions each month would be the same, but the person who started earlier would receive the benefit, on average, for a longer period of time and therefore have received a higher amount of total benefits, or total pension wealth.

Discrimination is a loaded word and not one that accurately describes NCTQ's recommendations.  While it is true that women have a longer life span than men, this does not equate to a defined contribution plan discriminating against them.  Each individual chooses how long he or she will work and when to retire.  If individuals, female or male, feel that they need more money in their retirement account because of a long life expectancy, they can delay their retirement, especially since they believe they will live to enjoy many years after working.  Gender is one of many factors, such as family medical history, that affects life expectancy. Looking purely at gender, by the state's own reasoning, the design of Georgia's current defined benefit system is biased against men because of their shorter life expectancy; perhaps that is a barrier to recruiting more men into the teaching profession.  In addition, even with knowledge of a longer life expectancy, women could prefer a defined contribution plan for its other components.  Women may value  the ability to leave funds to their children and the defined contribution plans' portability, since women are more likely to move based on spouses' reassignments and lose money due to defined benefits high mobility cost. 

How we graded

It is unfair to all teachers when pension wealth does not accumulate in a uniform way.

In addition to the ways defined benefit pension systems disadvantage teachers described in Goal 4-G, the way pension wealth accumulates in some systems further compounds the inequity. All pension systems use a multiplier to calculate the benefits an individual is entitled to receive based on salary levels and years of service. For example, a pension system may have a multiplier of 2.0. In such case, pension benefits are determined by multiplying average final annual salary by years of service and then multiplying the product by 2.0. Thus, someone working fewer years with a lower final salary would appropriately receive less in benefits than someone with more years of service and/or a higher final salary. However, the multiplier in many pension systems is not fixed; it increases as years of service increase. When a higher multiplier is used, teachers receive even more generous benefits.

Another way that pension benefits are awarded unfairly is through the common policy of setting retirement eligibility at different ages and years of service. For example, in a given state, a teacher with 30 years of service may retire at age 55, while teachers with fewer years of service may not retire until age 62. This means that a teacher who started teaching in this state at age 25 would reach 30 years of service at age 55 and receive seven additional years of full retirement benefits beyond what a teacher that started at age 32 and cannot retire with full benefits until age 62 would receive. A fair system would set a standard retirement age for all participants, without factoring in years of service.

Pension systems affect when teachers decide to retire as they look to maximize their pension wealth.

The year teachers reach retirement eligibility by age and/or years of service, their pension wealth peaks; pension wealth then declines for each year they work beyond retirement age. Plans that allow retirement based on years of service create unnecessary peaks, and plans that allow a low retirement age create an incentive to retire earlier in one's career than may be necessary. For every year teachers continue to work beyond their eligibility for unreduced retirement benefits, they lose that year of pension benefits, thus decreasing their overall pension wealth.
Although their yearly pension benefits would continue to rise as they earn additional service credit, it would only be at a small percentage per year, which would not make up for the loss of each year of benefits.

To try to balance this incentive to retire, some states have created DROP (Deferred Retirement Option Plan) programs. DROP programs allow participants to place their monthly pension benefits in a private investment account while still teaching and earning a salary, thus retaining those benefits. These teachers are, in effect, earning their pension and salary at the same time, and often at a relatively young age.

A DROP program is a band-aid on the problem; it does not fix what is structurally wrong: retirement at an early age without reduction of benefits. For example, the hypothetical teacher above decides to forgo retiring at age 47 in order to wait and qualify for her state's DROP program at age 55. She now has 33 years of service and has reached a pension equal to 66 percent of her salary. She remains in DROP for the maximum allowable five years. During that time, her five years of lost pension benefits plus her five years of mandatory employee pension contribution have been deposited in a private investment account. Upon retiring at age 60, she would receive the total of that private account plus a lifetime pension benefit annually of 66 percent of her final salary. With the lump-sum payment of her DROP account and monthly pension benefit, she will receive 100 percent of her final average salary for at least 10 years, and, depending on the state, she may also receive Social Security benefits. This generous guaranteed payout would be hard to find in any other profession.

DROP programs do create an incentive for some teachers to remain past their eligible retirement age, but at a high cost. DROP programs mean that districts still must find the funds to pay pension benefits to teachers at a relatively young age when those dollars could be more effectively spent.

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).