Pension Sustainability: Pennsylvania

2015 Pensions 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. (2015). Pension Sustainability: Pennsylvania results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/PA-Pension-Sustainability-74

Analysis of Pennsylvania's policies

As of June 30, 2015, the most recent date for which an actuarial valuation is available, Pennsylvania's pension system for teachers is 60.6 percent funded, a decrease of 3.2 percentage points since NCTQ's last report. Its current pension debt exceeds $21,200 per pupil throughout the state. It also has an amortization period of 30 years. Thus, if the plan earns its assumed rate of return of 7.5 percent and makes its full actuarially determined contribution payments, it would take the state 30 years to pay off its unfunded liabilities. The Commonwealth's funding ratio does not meet conventional standards, and its system is not financially sustainable according to actuarial benchmarks.

School districts are required to pay the full employer contribution rate, but then are reimbursed by the Commonwealth at an amount determined by formula and equal to at least one-half of the full employer contribution amount. The contribution rate for the Commonwealth and employers combined of 30.03 percent is very excessive in light of the fact that districts must also contribute 6.2 percent to Social Security.

The state pays the districts for their pension obligation for all employees hired after June 30, 1995. While this rate allows the state to pay off its liabilities within regulatory limits, it does so at a high cost, precluding Pennsylvania from spending those funds on other, more immediate means to retain talented teachers. The employee rate for new employees hired after July 1, 2011, ranges from 7.5 to 9.5 percent for class T-E and 10.3 to 12.3 percent for class T-F depending on how the system performs (teachers choose their class depending on what benefit multiplier they prefer; see pension neutrality goal). Member contribution rates increase within each range if the fund does not meet its assumed rate of return over a 10-year period. The 7.5 percent employee contribution rate is reasonable, although it is very close to what is considered excessive, and other rates in the range and the entire T-F class range are excessive in light of the fact that teachers must also contribute 6.2 percent to Social Security.

Citation

Recommendations for Pennsylvania

Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded. Pennsylvania, however, should consider ways to improve its funding level without raising the contributions of school districts and teachers. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention and crowd out funding for other areas in education. 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

Pennsylvania was helpful in providing information that enhanced this analysis. Pennsylvania also noted that its response to teacher and district contributions rates are reasonable "is a definitive yes." The contributions necessary to fund the plan (normal cost, accrued liability and UAL amortization) are actuarially determined on an annual basis. Employee contributions are set forth in statute.

Last word

While it is clear that Pennsylvania is taking important and necessary steps to improve the funding level of its system, the costs are extremely high and take a significant bite out of local district budgets, likely impacting other aspects of teacher compensation including salary as well as direct services to students.

How we graded

Research rationale

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.

Pension Sustainability: 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).