Pension Sustainability: Indiana

2011 Retaining Effective Teachers 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. (2011). Pension Sustainability: Indiana results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/IN-Pension-Sustainability-9

Analysis of Indiana's policies

As of July 1, 2010, the most recent date for which an actuarial valuation is available, Indiana's pension system for teachers is 44.3 percent funded and has an amortization period of over 30 years. This means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state over 30 years to pay off its unfunded liabilities.

However, Indiana has two pension plans. The state's pre-1996 plan, which is now closed, is a pay-as-you-go system and is only 33.1 percent funded. Indiana's current plan is 94.7 percent funded, and contributions were actually higher than the actuarial required contribution to meet a 30-year amortization period. Despite the strong funding of the current plan, Indiana's funding ratio and amortization period for its total system are still well below conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks.

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 not unreasonable, but districts must also contribute 6.2 percent to Social Security. This puts the state very close to an excessive contribution requirement. The state pays flat sums based on actuarial determined values for the pre-1996 account but has fallen short of contributing the amount needed to meet benefit demands. The mandatory employee contribution rate of 3 percent is also reasonable.

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 and had an amortization period of less than 30 years to allow more protection during financial downturns. The state's current plan almost meets this funding level, but the state needs 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. Goals 4-G and 4-I provide suggestions for pension system structures that are both sustainable and fair.

State response to our analysis

Indiana was helpful in providing facts that enhanced this analysis. The state also noted that the contribution rate for the current plan is higher than the actuarial required contribution by a decision of the board of trustees to establish a more stable rate over time. Knowing that the contribution rates would likely rise in the near future, it was decided to establish a rate that could most likely remain the same over the next few years. The pre-1996 plan's contributions are provided directly by the state as benefits become due. By design, the funding ratio is very low. The state has a solid plan in place to manage projected pre-1996 plan benefits payments. A part of the plan includes a separate fund (Pension Stabilization Fund) established in 1996 to provide a stable and sustainable growth rate to future state payments. By design, the pre-1996 funding status will gradually increase over time and is projected to be 100 percent funded in 2035.

Last word

The state is commended for providing its districts with a stable, predictable contribution rate for its teachers in the current pension plan and for having a plan to fund the pre-1996 plan. However, even with a viable plan, the pre-1996 funding status places a burden and large liability on the state, and a plan is always subject to policy changes based on a state's changing funding needs and politics. 

How we graded

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. Virtually all teachers are also entitled to a pension, which, upon vesting, provides compensation for the rest of their lives after retirement. In an era when retirement benefits have been shrinking across industries and professions, teachers' generous pensions remain fixed. In fact, 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.

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. Without reform, these systems are a house of cards, vulnerable to collapse as funding cannot keep up with promised benefits. And it is taxpayers who will have to pay if it all tumbles down.

Pension plans disadvantage teachers early in their careers by overcommitting employer resources to retirement benefits.

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. This is further exacerbated for states in which 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.

This approach to compensation disadvantages teachers early in their careers, as the commitment of resources to retirement benefits almost certainly depresses salaries and prevents incentives. Lower mandatory employer contribution rates (in states where they are too high; in some states they are shamefully low) would free up compensation resources to implement the kinds of strategies suggested elsewhere in the Yearbook. In addition, some states require high employee contributions; the impact this has on teachers' paychecks may affect retention, especially early in teachers' careers.

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).