Pension Flexibility: Minnesota

Pensions Policy

Goal

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

Meets goal in part
Suggested Citation:
National Council on Teacher Quality. (2015). Pension Flexibility: Minnesota results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/MN-Pension-Flexibility-74

Analysis of Minnesota's policies

Minnesota only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is not fully portable and does not provide any employer contribution for teachers who choose to withdraw their account balances when leaving the system. It also limits flexibility by restricting the ability to purchase years of service. The state is commended, however, for allowing teachers to vest at year three and for a provision that improves portability for teachers who defer their pensions.

Teachers in Minnesota 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. Non-vested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Minnesota's vesting at three years of service offers flexibility, but only for half of its teachers. According to a recent report, about 50 percent of employees in Minnesota's teacher-covered pension plan vest, meaning that the other 50 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions.

Teachers in Minnesota 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. Further, 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.

The state, however, does offer a portability feature for vested teachers who exit the system but leave their funds in until a later retirement date, known as the portable deferred pension provision. The deferred provision calculates the benefit when a teacher leaves employment, and the benefit is then increased annually at a compounded rate of 2 percent per year until the member retires. This provision at least reduces pension wealth loss due to inflation.

Minnesota limits 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. Minnesota's plan does not allow teachers to purchase time for previous teaching experience, which is a severe disadvantage to teachers who move to Minnesota with teaching experience. The state's plan, however, does allow teachers to purchase one year of time per approved parental leaves of absence and up to five years for extended leaves of any reason.

Citation

Recommendations for Minnesota

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

Increase the portability of its defined benefit plan.
If Minnesota maintains its defined benefit plan, it should allow teachers that leave the system to withdraw employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience. A lack of portability is a disincentive to an increasingly mobile teaching force.

Offer a fully portable supplemental retirement savings plan.
If Minnesota 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

Minnesota asserted that it does allow purchase of service credit for approved leaves of absence and prior teaching experience.

Last word

None of the citations provided by the state address a policy for purchasing time for approved leaves of absence.

Research rationale

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.

Pension Flexibility: Supporting Research
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). Can be accessed at: http://docplayer.net/16288272-Public-employees-retirement-system-of-the-state-of-nevada-analysis-and-comparison-of-defined-benefit-and-defined-contribution-retirement-plans.html