Pension Flexibility: Iowa

2011 Retaining Effective Teachers Policy

Goal

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

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

Analysis of Iowa's policies

Iowa 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 four and limits any employer contribution for teachers who choose to withdraw their account balances when leaving the system. However, the state is commended for offering full flexibility for purchasing time.

Teachers in Iowa 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. Nonvested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Iowa's current vesting at four years of service is earlier than most states' but still limits the options of teachers who leave the system prior to this point.  Effective July 1, 2012, vesting increases to seven years.

Iowa does at least offer some portability to vested teachers leaving the system, which is rare among defined benefit plans. Nonvested teachers who choose to withdraw their contributions upon leaving only receive their own contributions plus interest. This means that those who withdraw their funds accrue no benefits beyond what they might have earned had they simply put their contributions in basic savings accounts. Once vested, teachers who withdraw their contributions also receive an employer match of one-thirtieth of their years of service plus interest (e.g., teachers with 10 years of experience would receive a 33 percent employer match).  While it would be preferable for the state to offer a 100 percent match and allow employer contributions to teachers with less than four years of experience, Iowa is commended for offering at least some match. However, teachers who leave with no match or a small match and 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.

Iowa is commended for offering full flexibility for 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. Iowa's plan allows teachers to purchase an unlimited amount of previous teaching experience, approved leaves of absence and an additional five years of "air time" for any reason. In addition, teachers receive free credit for any leaves approved under the Family Medical Leave Act. These provisions are very advantageous for teachers who move to Iowa with teaching experience and those who need to take personal leaves, such as maternity or paternity leave.

Citation

Recommendations for Iowa

Offer teachers a pension plan that is fully portable, flexible and fair.
Iowa 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 Iowa participate in Social Security, they are required to contribute to two defined benefit-style plans.

Increase the portability of its defined benefit plan.
If Iowa maintains its defined benefit plan, it should allow all teachers that leave the system to withdraw a portion of employer contributions and increase that portion to 100 percent for vested teachers. The state should also decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.   

Offer a fully portable supplemental retirement savings plan.
If Iowa maintains its defined benefit plan, the state should at least offer teachers the option of a fully portable supplemental defined contribution savings plan, with employers matching a percentage of teachers' contributions.

State response to our analysis

Iowa noted that there is portability among all public schools in Iowa, including with community colleges, universities and other public employers, and that schools may participate in the state's deferred compensation program or offer their own 403(b) savings plans. The state reiterated that teachers may purchase credit for previous service by rolling money into the IPERS system from another system. Iowa also questioned the statistics supporting the claim that teachers are moving to other states for educational employment opportunities.

Last word

Being able to continue membership within the state of Iowa is valuable, but despite the variety of employers within the state, it still does not aid educators who move out of the state. The option for schools to participate in other deferred compensation plans does not guarantee that they will and that all teachers will have access to a supplemental portable savings program.

As to the inquiry about teacher mobility between states, it is estimated that approximately one-sixth of teachers move between states during their professional careers. This percentage does not include teachers that may leave the profession when they move to other states, perhaps because of defined benefit plans' limited mobility.

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).