Pension Flexibility: Missouri

Analysis of Missouri's policies

Missouri 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. It also limits flexibility by restricting the ability to purchase years of service. 

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

Teachers in Missouri 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.

Missouri 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. Missouri's plan allows teachers with one year of service credit to purchase time for previous teaching experience; however, purchased service cannot exceed service in Missouri at the time of retirement. While better than not allowing any purchase at all, this provision disadvantages teachers who move to Missouri with more teaching experience. In addition, the mandatory one year of service before purchasing previous service makes the purchase cost slightly more expensive. The state's plan also allows for the purchase of up to one year of service time for each approved maternity and paternity leave. 

Citation

Public School Retirement System of Missouri Publications, 2010-2011 Member Handbook http://www.psrs-peers.org/PSRS/Publications.html

Recommendations for Missouri

Offer teachers a pension plan that is fully portable, flexible and fair.
Missouri 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 Missouri 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 Missouri maintains its defined benefit plan, it should allow teachers that leave the system to withdraw matching employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience and 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 Missouri 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

Missouri stated that its views about providing retirement security for Missouri's educators differ [from those in the analysis] in a number of areas. The Public School and Education Employee Retirement System of Missouri (PSRS/PEERS) was created to help Missouri's school districts attract and retain the best and brightest educators for its children. After a full career of service, the members of PSRS/PEERS can retire with a stable and secure retirement.

In addition, the state expressed its commitment to providing these benefits with the greatest possible value. The analysis's goal of providing a defined contribution (DC) plan or a cash balance plan as the cornerstone of an educator's retirement is a frightening proposal. Dollar for dollar, the defined benefit (DB) plan offered through PSRS/PEERS offers a much better benefit and greater retirement security to our members. There are a number of reasons why this is the case: 1. Unlike individuals who are left to save for retirement on their own, DB Plans don't force educators to guess their life expectancy. As a result, they can avoid over saving for retirement based on the fear that they will someday run out of money. Fortunately, DB plans can save for the average life expectancy and the PSRS/PEERS actuaries can calculate this number with relative certainty; 2. DB plans have a much longer life expectancy than individuals so their investments can be managed accordingly. Individuals with DC plans have to adjust their asset allocation throughout their career and their retirement. Most financial advisors encourage customers to move away from investments with higher risk/returns to more conservative investments as they get older. While this may be a wise decision if all of a person's retirement money is in a DC plan, it significantly reduces their investment return throughout their life. However, DB plans can maintain the optimal asset allocation year after year resulting in much higher returns; 3. DB Plans achieve higher investment returns at a much lower cost compared to individual accounts. As a result, educators and school districts can contribute less to the plan throughout an educator's career. Most DC plans charges fees of 1 to 2 percent while PSRS/PEERS manages the trust fund at less than 1/2 percent.

Last word

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. Currently, Missouri's system requires a combined contribution rate of approximately 30 percent, and that does not even result in an adequately funded system (see Goal 4-H). 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 who work in a single state for their whole 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.