The state should ensure that pension systems are portable, flexible and fair to all teachers.
South Carolina offers the option of a defined contribution plan or a defined benefit plan for all teachers. The state provides new teachers with very informative literature describing the advantages, disadvantages and estimated benefit payouts for both types of plans. New teachers must then choose one plan within 30 days of their start of employment; if no plan is chosen, teachers are automatically enrolled in the defined benefit plan and may not switch. Teachers who elect to join the defined contribution plan may switch to the defined benefit plan within their first five years of service during an annual open enrollment period; however, for each year they wish to purchase, they must pay 16 percent of their highest salary. This is an unfortunate structure that may not allow teachers to make the best decisions. The state, however, is commended for also offering two fully portable supplementary savings plans. Teachers in South Carolina also participate in Social Security.
South Carolina's defined benefit plan is not fully portable, does not vest until year eight, and does not provide any employer contribution for teachers who withdraw their accounts. The state does offer flexibility through reasonable provisions 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. 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. South Carolina's defined benefit plan's vesting at eight years of service limits the options of many teachers who leave the system prior to this point.
Many teachers in South Carolina will leave the system before they reach 10 years of service. According to a recent report, only 33 percent of employees in South Carolina's teacher-covered pension plan vest, meaning that 67 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions. Teachers in the defined benefit plan who choose to withdraw their contributions upon leaving only receive their own employee contributions plus interest. This means that those who withdraw their funds accrue fewer benefits than what they might have earned had they simply put their contributions in basic savings accounts. Furthermore, 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.
South Carolina's defined benefit plan does increase teachers' flexibility within its provisions 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. South Carolina's plan allows teachers to purchase an unlimited amount of time for previous teaching experience. In addition, the state's plan allows teachers to purchase time for approved leaves of absence, up to four years per leave as long as teachers return within four years of the leave. These provisions are an advantage to those who move to South Carolina with previous teaching experience and those who need to take personal leaves, such as maternity or paternity leaves. South Carolina's defined contribution plan is fully portable and flexible for teachers.
In defined contribution plans, full vesting entitles teachers access to their funds and any available employer contributions. South Carolina's defined contribution plan vests immediately upon membership. When vested teachers end their service in South Carolina, they may withdraw their contributions, the employer contributions, and investment earnings.
In addition, the state is commended for offering two fully portable supplemental savings plans. The South Carolina Deferred Compensation Program (SCDCP) offers a 401(k) savings plan and a 457 savings plan. Teachers decide how much to contribute to these tax-deferred savings plans, and they choose how to invest their contributions. Contributions and their earnings are taxed at the time of withdrawal.
South Carolina Public Employee Benefit Authority, South Carolina Retirement System. SCRS Member Handbook, July 2014 Edition. South Carolina State Optional Retirement Program Plan Document, Amended and Restated Effective November 20, 2013, http://www.peba.sc.gov/assets/stateorpplandocument.pdf South Carolina Deferred Compensation Program http://www.fascore.com/PDF/SouthCarolina/planFeaturesAndHighlights.pdf Aldeman, C. and Rotherham, A. (2014). Friends without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security, Bellwether Education Partners.
Increase the portability of the defined benefit plan.
If South Carolina maintains its defined benefit plan, it should allow all teachers that leave the system to withdraw their employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience at the start of employment, at least one year per approved leave of absence with a maximum of total purchased service, 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 plan.
While South Carolina at least offers teachers the option of a supplemental defined savings option, this option would be more meaningful if the state required employers also to contribute and if there were multiple investment options.
Allow teachers more time to choose their retirement plan.
South Carolina should allow teachers more than 30 days to choose their retirement plan. This time is not sufficient for new teachers, often young and new to retirement plan information, to fully educate themselves on their choices at the same time as adjusting to their new employment responsibilities. If a longer choice period is not possible, teachers should be allowed to switch plans within the first year of employment after being automatically enrolled in the defined benefit plan.
South Carolina was helpful in providing information 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.