Pension Flexibility: South Dakota

2011 Retaining Effective Teachers Policy

Goal

The state should ensure that pension systems are portable, flexible and fair to all teachers.

Best Practice
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Flexibility: South Dakota results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/SD-Pension-Flexibility-9

Analysis of South Dakota's policies

South Dakota only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is nearly fully portable—considerably more so than any other defined benefit plan offered to teachers in other states—through provisions including vesting at year three and providing employer contributions to those that withdraw their account balances when leaving the system. The state is also commended for offering a fully portable supplementary savings plan. 

Teachers in South Dakota also participate in Social Security, so they must contribute to the state's 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 two defined benefit-style programs, rather than permitting teachers options for their state-provided savings plans.

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. South Dakota's vesting at three years of service is better than most states, and allows flexibility for many of the teachers who leave the system.

South Dakota does offer some portability to both nonvested and vested teachers leaving the system, which is rare among defined benefit plans. Teachers with less than three years of experience who choose to withdraw their contributions upon leaving receive their own contributions plus interest and a 50 percent employer match. Teachers with at least three years of experience may withdraw their contributions plus interest and an 85 percent employer match. While it would be preferable for the state to offer a 100 percent match, South Dakota is commended for offering all teachers at least some employer match.  

South Dakota offers 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. South Dakota's plan allows teachers to purchase unlimited time for previous teaching experience, which is more generous than most states. The state's plan also allows for the purchase of maternity or paternity leave, which is an advantage to any teacher who needs to take leave for parental care or for other personal reasons.

South Dakota is also commended for offering a fully portable supplementary savings plan. The state provides a tax-deferred savings plan known as the  Supplemental Retirement Plan (SRP). It is voluntary and contains no employer contributions.

Citation

Recommendations for South Dakota

Increase the portability of the defined benefit plan.
If South Dakota maintains its defined benefit plan, it should allow teachers leaving the system to withdraw 100 percent of employer contributions. The state should also allow teachers to purchase time for approved leaves of absence. A lack of portability is a disincentive to an increasingly mobile teaching force. 

Offer an employer contribution to the supplemental retirement savings plan.
While South Dakota at least offers teachers the option of a supplemental defined contribution savings option, this option would be more meaningful if the state required employers also to contribute and if there were multiple investment options. 

State response to our analysis

South Dakota was helpful in providing NCTQ with facts that enhanced this analysis.
       The state also noted that while the analysis is factually accurate, the recommendations present sustainability issues.

How we graded

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 is as much 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 an explosion 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. It must also be noted that defined benefit plans can be portable and fair, if structured as cash balance plans or plans that permit the withdrawal of employer contributions.

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).