Pension Sustainability: Mississippi

2011 Retaining Effective Teachers Policy

Goal

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

Meets a small part
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Sustainability: Mississippi results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/MS-Pension-Sustainability-9

Analysis of Mississippi's policies

As of June 30, 2010, the most recent date for which an actuarial valuation is available, Mississippi's pension system for teachers is 64.2 percent funded and has a 30-year amortization period. This means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state 30 years to pay off its unfunded liabilities. While its amortization period meets requirements, Mississippi's funding level is too low. The state's system is not financially sustainable according to actuarial benchmarks.

In addition, Mississippi commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 12 percent and the employee contribution rate of 9 percent are too high, in light of the fact that local districts and teachers are contributing an additional 6.2 percent to Social Security.

The rates are determined by the board of trustees, and are based on its funding policy, which states that increases will be evaluated on an annual basis in order to maintain an amortization period of 30 years or less. While these rates allow the state to pay off liabilities within the required 30-year period, it does so at great cost, precluding Mississippi from spending those funds on other more immediate means to retain talented teachers. 

Citation

Recommendations for Mississippi

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. However, Mississippi should consider ways to improve its funding level without raising the contributions of school districts and teachers. 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

Mississippi recognized the factual accuracy of this analysis. The state added that any statements about what the plan should offer to its participants are a matter of opinion and are best addressed by state policy makers.

Mississippi also noted that on October 24, 2006, the Board of Trustees of the Public Employees' Retirement System of Mississippi (PERS) adopted a funding policy related to the funded status of PERS, which encompasses the employer contribution rate and the implementation of benefit enhancements. The funding goals include: to maintain a stable or increasing ratio of system assets to accrued liabilities, and eventually to reach a 100 percent funding ratio; to maintain adequate asset levels to finance the benefits promised to members; to develop a pattern of stable contribution rates when expressed as a percentage of member payroll as measured by valuations prepared in accordance with the principles of practice prescribed by the Actuarial Standards Board with a minimum employer contribution equal to the normal cost determined under the Entry Age Normal funding method; and to provide intergenerational equity for taxpayers with respect to system costs.

Last word

NCTQ commends the positive direction that the Board took in 2006. However, a system, that five years later is only 64.2 percent funded does not provide intergenerational equity, as taxpayers and new teachers will be paying for the benefits of current retirees while they see their own benefits reduced.

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).