Pension Sustainability: Indiana

Pensions Policy

Goal

The state should ensure that excessive resources are not committed to funding teachers' pension systems.

Meets in part
Suggested Citation:
National Council on Teacher Quality. (2017). Pension Sustainability: Indiana results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/IN-Pension-Sustainability-80

Analysis of Indiana's policies

As of July 1, 2015, the most recent date for which an actuarial valuation is available, Indiana's pension system for teachers is 46.4 percent funded, an increase of 0.7 percentage points since NCTQ's last report. Its current pension debt exceeds $11,700 per pupil throughout the state. The plan's amortization period is 26 years. This means that if the plan earns its assumed rate of return of 6.75 percent and makes its full actuarially determined contribution payments, it would take the state 26 years to pay off its unfunded liabilities.

Indiana has two pension plans. The state's "Pre-1996 Account" plan, which is now closed, is a pay-as-you-go system and is only 30.4 percent funded, though actuaries project it to become fully funded by 2036. Indiana's current plan is 92.5 percent funded and projected to be 100 percent funded by 2021. Despite the strong funding of the current plan, Indiana's funding ratio for its total system is still well below conventional standards.

In addition, Indiana's required contributions to its teachers' retirement system leave little room to improve its funding level and amortization period. The current employer contribution rate of 7.5 percent, which the district pays for employees hired after 1995, is reasonable, but districts must also contribute 6.2 percent to Social Security. This puts the state very close to an excessive contribution requirement.

Citation

Recommendations for Indiana

Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded to allow more protection during financial downturns. The state's current plan almost meets this funding level, but the state should maintain efforts to improve the funding of its pre-1996 plan. However, Indiana should consider ways to improve its funding level without raising the contributions of school districts. In fact, the state should work to decrease employer contributions. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention. Improving funding levels necessitates, in part, systemic changes in the state's pension system. The goals on pension flexibility and pension neutrality provide suggestions for pension system structures that are both sustainable and fair.

State response to our analysis

Indiana was helpful in providing NCTQ with facts that enhanced this analysis.

Updated: December 2017

How we graded

Research rationale

Many states' pension systems are based on promises they cannot afford to keep. Teacher salaries are just one part of the compensation package that teachers receive. Pensions, upon vesting, provide compensation for teachers the rest of their lives after retirement. In an era when retirement benefits have been shrinking across industries and professions, many teachers' generous pensions remain fixed. In fact, nearly all states continue to provide teachers with a defined-benefit pension system,[1] an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers.[2]

Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices.[3] Without reform, funding is unlikely to keep up with promised benefits and these systems will become increasingly vulnerable to collapse.

Pension plans disadvantage teachers early in their careers. By overcommitting employer resources to retirement benefits, these plans often require districts to depress salaries and restrict incentives. The contribution of employers to their workers' retirement benefits is a valuable benefit, important to ensuring that individuals have sufficient retirement savings. Compensation resources, however, are not unlimited, and they must fund both current salaries and future retirement benefits. Mandated employer contributions to many states' teacher pension systems are extremely high, leaving districts with little flexibility to be more innovative with their compensation strategies.[4] Lower mandatory employer contribution rates (in states where they are too high; in some states they are shamefully low) would free up valuable compensation resources to ensure pension systems are more sustainable and equitable for all teachers. In addition, some states require high employee contributions; the impact this has on teachers' paychecks may affect retention, especially early in teachers' careers.[5]


The burden placed on districts to fund unsustainable pension systems is further exacerbated for those in states where teachers also participate in Social Security, requiring the district to pay even more toward teacher retirement. While retirement savings in addition to Social Security are necessary, states are mandating contributions to two inflexible plans rather than permitting options for teachers or their employing districts.[6]


[1] Doherty, K. M., Jacobs, S., & Lueken, M. F. (2017, February). Lifting the pension fog: What teachers and taxpayers need to know about the teacher pension crisis. Retrieved from National Council on Teacher Quality website: https://www.nctq.org/dmsView/Lifting_the_Pension_Fog
[2] For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Costrell, R. M., & Podgursky, M. (2011, February). Reforming k-12 educator pensions: A labor market perspective. New York, NY: TIAA-CREF Institute. Retrieved from https://www.tiaainstitute.org/public/institute/research/briefs/institute_pb_reforming_K-12_educator_pensions.html
[3] NCTQ's analysis of the financial sustainability of state pension systems is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office. (2007). Government Accounting Standards Board statement No. 25. Retrieved from http://www.gasb.org/st/summary/gstsm25.html
[4] Costrell, R. M., & Podgursky, M. (2011, February). Reforming k-12 educator pensions: A labor market perspective. New York, NY: TIAA-CREF Institute. Retrieved from https://www.tiaainstitute.org/public/institute/research/briefs/institute_pb_reforming_K-12_educator_pensions.html
[5] For further evidence supporting NCTQ teacher pension standards, see The Segal Group, Inc. (2010). Public employees' retirement system of the state of Nevada: Analysis and comparison of defined benefit and defined contribution retirement plans. Retrieved from https://www.nvpers.org/public/executiveOfficer/2010-DB-DC%20Study%20By%20Segal.pdf
[6] For additional information on state pension systems, see Loeb, S. & Miller, L. (2006). 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. Retrieved from http://web.stanford.edu/~sloeb/papers/Loeb_Miller.pdf; and Hansen, J. (2008, May). Teacher pensions: A background paper. Committee for Economic Development. Retrieved from http://eric.ed.gov/?id=ED502293