Pension Flexibility: Louisiana

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: Louisiana results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/LA-Pension-Flexibility-9

Analysis of Louisiana's policies

Louisiana 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.

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. Louisiana's vesting at five years limits the options of teachers who leave the system prior to this point.

Teachers in Louisiana who choose to withdraw their contributions upon leaving only receive their own contributions with no interest. This means that those who withdraw their funds accrue fewer benefits than what they might have earned contributing to basic savings accounts. 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 Louisiana's contribution rate allows for flexibility in teachers' retirement savings, it also means that the state needs to educate teachers on what happens if they leave the system and encourage savings in other portable supplemental plans. Furthermore, 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.

Louisiana has some limits on 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. Louisiana's plan allows teachers to purchase time for all previous teaching experience, which is more generous than most states'. The state's plan also allows for the purchase of approved leaves of absence but only one year of leave for each five years of service in Louisiana. This may be a disadvantage to those teachers who need to take more leave for personal reasons, such as maternity or paternity.

The state is commended for offering a fully portable supplemental savings plan. Teachers can participate in the Louisiana Deferred Compensation Plan, a 457 retirement plan. However, there are no employer contributions.

Citation

Recommendations for Louisiana

Offer teachers a pension plan that is fully portable, flexible and fair.
Louisiana 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 Louisiana 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 Louisiana maintains its defined benefit plan, it should allow teachers that leave the system to withdraw their employee contribution plus matching employer contributions and interest. The state should also remove restrictions to purchasing approved leaves of absence 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 Louisiana at least offers teachers the option of a supplemental defined contribution savings option, this option would be more meaningful if the state required employers also to contribute. 

State response to our analysis

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

Louisiana disagreed with the conclusion that a pension option, like a defined contribution plan, should be the primary pension plan for Louisiana's K-12 teachers. It is the state's position that the Teachers' Retirement System of Louisiana's (TRSL) traditional defined benefit plan should remain as the retirement plan option available to Louisiana's K-12 teachers.

The state maintained that the TRSL Defined Benefit Plan for K-12 teachers in Louisiana provides teachers with many benefits, including, but not limited to: a guaranteed lifetime income to retirees and irreplaceable financial security; more effective reduction of different types of risk for employees (investment risk, longevity risk, inflation risk, contribution risk, leakage risk, disability risk, survivor risk, etc.); more income for career employees, motivating employees to continue in service; easy understandable relationship to working pay; ability to have service credit reciprocated or to purchase service credit; and opportunities for permanent benefit increases after retirement. The TRSL defined benefit plan sets forth a comprehensive retirement program that provides for normal retirement, disability retirement, survivor benefits, potential for retiree permanent benefit increases, and portability through service credit purchase options and reciprocity.

Louisiana contended that the ability to purchase service credit and reciprocal recognition of service credit is an important means of pension portability in TRSL's defined benefit plan. Louisiana, like most other states, permits teachers to purchase service credit for out-of-state teaching. Within Louisiana, TRSL's vast membership coverage and the various recognition and purchase of service credit provisions of the TRSL plan afford members the opportunity for mobility among public and private teaching positions and other public sector employment. TRSL's plan includes in its membership all public elementary and secondary teachers, higher education instructional staff and various other education-related entities. Pursuant to Louisiana law, TRSL recognizes reciprocal service credit from any other Louisiana state, municipal or parochial retirement system and each of those systems recognizes TRSL service credit. Members of Louisiana retirement systems have the option of combining all service credit or transferring service credit from one state, municipal or parochial retirement system to another.

In addition, the state noted that members of TRSL can purchase service credit canceled as a result of withdrawal of contributions, teaching service while on leave of absence without pay, teaching service in any nonpublic college or university or school in Louisiana, teaching service in any United States dependent school, substitute teaching service and military service. While on sabbatical leave, TRSL members are considered to be on active service and receive service credit that corresponds to the time period for which they are on sabbatical leave, when full contributions are made.

Louisiana maintained that traditional defined benefit plans have a proven track record of attracting and retaining teachers and are more efficient in providing a target level of retirement income than defined contribution plans. A guaranteed lifetime income provides retirees with financial security. As has been demonstrated by recent economic downturns, individual retirement accounts have experience unprecedented declines in their value. TRSL believes that Louisiana's teachers should not become employees who must rely solely on defined contribution plans to provide their retirement.

Last word

Teachers not covered by Social Security do have to be particularly thoughtful regarding their retirement savings plan; that does not mean they cannot benefit from a fully portable and flexible savings plan. In fact, teachers not covered by Social Security are in even more need of a portable plan because if they move out of state or to a different profession at an early stage in their career, they are left with little savings for retirement. 

Defined contribution plans can be structured to have many of the benefits of defined benefit plans, but with the added benefits of portability and flexibility to attract new individuals to the profession and to treat all teachers fairly for each year of service, not to mention less stress to states' financial health (see Goal 4-H). Plans can be structured as cash balance plans that allow the employer to maintain the investment risk and to include benefits such as disability and survivor coverage. Teachers' individual accounts can be invested in statewide, professionally managed funds to align their earnings and losses with other statewide plans, such as a defined benefit plan. Increased participation in defined contribution plans may also result in lower fees more commensurate with defined benefit plans. Teachers must receive proper education on topics such as longevity risk, tax implications and annuity options. The state may also consider enrolling its teachers in Social Security to give them full portability.

Defined benefit plans do provide retirement security to long-time teachers, but at a great cost both in terms of actual dollars spent and the commitment of those dollars to the pension system rather than other compensation strategies that may aid in recruitment and retention. The benefits are so back loaded and tied to longevity that the dollars spent on retirement are often not valued because they are not seen by potential employees. Many individuals may never enter the profession if they know they may not be able to dedicate 25 or more years within one system because they can receive more balanced compensation in a different sector. Teachers who move between states, while still dedicating their life to teaching, receive far less in retirement benefits even though they educated just as many students for just as long as teachers in a single state for their entire career. Further, our systems need to attract highly effective teachers who can produce great results, especially in high-needs schools, whether or not they are prepared to make a career-long commitment or only teach for shorter periods of time.  A defined benefit pension system does not grant shorter-term teachers the same pension wealth per year of teaching as a teacher who was able to teach longer in a different assignment.

Individual retirement plans do pose greater risks to employees, but all retirement accounts pose risk somewhere. Defined benefit plans are not immune from risk, they are just better able to pass on the cost to other individuals (see Goal 4-H).

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).