The state should ensure that pension systems are portable, flexible and fair to all teachers.
Oregon only offers a type of hybrid DB/DC pension plan to its teachers as their mandatory pension plan. Even though it is a hybrid, only the DC component is fully portable; the DB component does not vest until year five and does not provide access to any employer contribution for teachers who withdraw their accounts, except for OPSRP pension program member withdrawals from the DB component with benefits valued at less than $ 5,000. It also limits flexibility by restricting the ability to purchase years of service for teachers hired after August 28, 2003. The state, however, is commended for offering two fully-portable supplemental savings plans.
Oregon's hybrid plan has defined benefit and defined contribution components, known as Tier One (for members hired before 1/1/1996) and Tier Two (for members hired between 1/1/1996 and 8/28/2003) and the Oregon Public Service Retirement Program (OPSRP) Pension Plan (for members hired after 8/28/2003) (the defined benefit components) and the Individual Account Program (IAP; the defined contribution component). Beginning January 1, 2004, employers now fully fund the defined benefit components and may also make optional contributions to the defined contribution component. Teachers only contribute to the defined contribution component (the IAP account), which is invested as part of the overall PERS fund by the Oregon Investment Council with earnings credited annually to the member's account. When teachers receive their benefits at retirement age, they receive the contributions and earnings accumulated in their defined contribution IAP account, plus monthly payments according to the defined benefit formula. In addition, employers may create and fund a supplemental IAP account for each employee.
Teachers in Oregon also participate in Social Security, so they must contribute to the state's hybrid-styled 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 multiple plans with defined benefit structures, rather than permitting teachers options for their state-provided retirement savings plans.
Vesting in a defined benefit plan, or the defined benefit component of a hybrid 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. Oregon's vesting at five years of service limits the options of many teachers who leave the system prior to this point. According to a recent report, only 57 percent of employees in Oregon's teacher-covered pension plan vest, meaning that 43 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions plus earnings on those contributions.
In defined contribution plans, full vesting entitles teachers access to their funds and any available employer contributions. Oregon teachers are immediately vested in their own IAP accounts and accumulated earnings; however, they are not vested in their optional employer-created IAP accounts until year five.
When non-vested OPSRP pension program teachers hired after August 28, 2003 end their service in Oregon, they may withdraw only their self-funded IAP accounts and accumulated earnings; they may not withdraw any money from their defined benefit program or optional employer-funded IAP account. Vested teachers may withdraw from their employee-funded IAP account and earnings, their optional employer-funded IAP account and their OPSRP Pension Program if the value of their benefit at the time of withdrawal is $5,000 or less. If it is more than $5,000, they must wait to receive monthly payments at retirement age. This means that those non-vested teachers who withdraw their accounts and funds and remain in the field of education but enter another pension plan (such as in another state) may 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 except as noted.
Oregon 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. Oregon's OPSRP defined benefit plan does not allow teachers hired after August 28, 2003to purchase time for previous teaching experience or approved leaves of absence. This is a severe disadvantage to teachers who move to Oregon with teaching experience and those who need to take leave, such as for maternity or paternity leave or other personal reasons.
Oregon is commended for offering two optional supplementary defined contribution plans. Teachers are eligible to participate in a 403(b) program and the Oregon Savings Growth Plan (OSGP), a 457 deferred compensation plan. Both plans allow participants to make contributions that accumulate tax deferred until withdrawal. Teachers can participate in both plans at the same time.
Oregon Public Employees Retirement System www.oregon.gov/PERS. Aldeman, C. and Rotherham, A. (2014). Friends without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security, Bellwether Education Partners.
Offer teachers a pension plan that is fully portable, flexible and fair.
Oregon 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. As the sole option, however, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because teachers in Oregon participate in Social Security, local districts are required to contribute to two defined benefit-structured components.
Increase the portability of its defined benefit component.
If Oregon maintains its defined benefit component, it should allow teachers that leave the system to withdraw employer contributions as part of their IAP accounts. The state should also allow teachers to purchase their full amount of previous teaching experience upon the first day of employment, allow for the purchase of at least one year for each approved personal leave 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 Oregon at least offers teachers the option of a supplemental defined contribution savings option, this option would be more meaningful if the state also required employers to contribute.
Oregon was helpful in providing facts that enhanced this analysis.
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 takes as long 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 growth 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. However, it must be noted that defined benefit plans can also be portable and fair, so long as they are structured as cash balance plans or plans that permit the withdrawal of employer contributions.