Pension Flexibility: New York

Analysis of New York's policies

New York only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is not fully portable and does not vest until year 10.  It also limits flexibility by restricting the ability to purchase years of service and denying vested teachers the ability to withdraw their account balance when they leave the system rather than receiving monthly benefits at retirement age. 

Teachers in New York 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 to two inflexible plans, 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. New York teachers who enter the pension system on or after January 1, 2010, vest at 10 years of service, which is very late and limits the options of teachers who leave the system prior to this point. Teachers who entered prior to this date vest at five years.

Many teachers in New York will leave the system before they reach 10 years of service. Non-vested teachers who choose to withdraw their contributions upon leaving only receive their own contributions plus interest. This means that those who withdraw their funds accrue no benefits beyond what they might have earned had they simply put their contributions in basic savings accounts. Further, 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. In addition, vested teachers may not withdraw their account balances at all when they leave the system; they must wait until retirement age and receive their monthly defined benefit pension payments. This severely limits the flexibility and portability of this pension plan for teachers who need to leave the system after vesting but before retirement age. However, recent legislation does allow teachers who leave the system and enter a new public retirement system to withdraw their accounts and receive retirement credit in their new system once they have accrued five years of service in the new system.

New York further limits teachers' flexibility by denying teachers the ability 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. New York's plan does not allow teachers to purchase service for previous teaching in another state or for approved leaves of absence. This provision severely disadvantages teachers who move to New York with teaching experience and those that need to take a leave for paternity or maternity care, or for other personal reasons.

Citation

New York State Teachers' Retirement System, Active Members' Handbook http://www.nystrs.org/main/library/handbook/handbook.htm

Recommendations for New York

Offer teachers a pension plan that is fully portable, flexible and fair.
New York 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. However, as the sole option, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because teachers in New York participate in Social Security, they are required to contribute to two defined benefit-style plans.

Increase the portability of its defined benefit plan.
If New York maintains its defined benefit plan, it should allow all teachers that leave the system to withdraw their employee contributions plus interest and matching employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience, at least one year per approved leave of absence, and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.  

Offer a fully portable supplemental retirement savings plan.
If New York maintains its defined benefit plan, the state should at least offer teachers the option of a fully portable supplemental defined contribution savings plan, with employers matching a percentage of teachers' contributions.

State response to our analysis

New York maintained that the New York State Teachers' Retirement System (NYSTRS) administers the pension plan structure enacted by the legislature. The system does not determine the provisions of the plan. New York law provides portability within New York State in that a teacher can receive retirement benefits from NYSTRS for working for over 800 different participating educational employers. State law also provides reciprocity among the different public employee retirement systems within New York. A public school teacher who terminates teaching employment within a NYSTRS participating employer and enters the service of another public employer in New York (including the City of New York) can transfer his or her benefit to another public employee retirement system within New York.The state noted that five years of service is required for vesting purposes for Tiers 1-4 and 10 years for Tier 5. Teachers who are Tier 1 and 2 members of the system and leave service can elect to terminate their memberships and receive a refund of any accumulated contributions they have made. Teachers who are Tiers 3, 4 and 5 members of the system and leave service prior to accumulating 10 years of credited service are permitted to terminate their memberships and receive a refund of their accumulated contributions. Tiers 3, 4 and 5 teachers with 10 or more years of service are not permitted to terminate their memberships. Refunded contributions are paid in all cases with interest at a guaranteed annual rate of 5 percent. Currently, the 5 percent return for departing teachers is noticeably better than "...what they might have earned had they simply put their contributions in basic savings accounts" as stated in the analysis. Federal tax law allows departing teachers to roll their refunded accumulated contributions into an IRA or other retirement plan.Further, New York commented that with all due respect to the portability and flexibility issues raised, the overall purpose of the system is to provide an appropriate benefit for dedicated individuals who have spent a career educating the youth of New York State, not to provide a reward for people who spend a few years teaching before moving on to other states or other careers. The legislature has not elected to enhance the amounts paid to teachers who leave service without qualifying for a retirement benefit beyond the payment of their accumulated contributions with 5 percent interest as discussed above. On the other hand, it should be noted that contrary to the suggestion in the recommendation for this goal, a defined benefit plan such as NYSTRS can be highly beneficial to persons who enter teaching later in life, as their benefit from a defined benefit plan would likely exceed whatever benefit could be accumulated during their remaining career under a defined contribution plan.The state concluded that with respect to the specific suggestions listed—such as establishing a defined contribution plan, three-year vesting, offering a lump-sum option, permitting service credit purchases for any prior employment, official leaves of absence—these items are under the purview of the legislature. Some have been considered but not enacted. The legislature has crafted a benefit structure they deem to be appropriate from the standpoint of costs and benefits.

Last word

Although New York's pension plan offers membership across various employers within the state, despite the size of the state and variety of employers, it still does not aid educators who move out of the state. 

The state does offer an interest at a higher rate than current basic savings plans. This is a valuable aspect of the system for teachers who choose to withdraw their contributions. While there is little inflation, the 5 percent rate is almost similar to offering an employer match. However, as interest rates in the nation rise, the state's guaranteed rate may return to being more similar to basic savings accounts. In addition, interest rates credited to accounts are easily altered, and instituting a guaranteed employer match of contributions would offer more security for teachers who withdraw their funds.

Defined benefit plans do provide retirement security to long-time teachers, but at a great cost both in terms of actual dollars spent and the commitment of those dollars to the pension system rather than other compensation strategies that may aid in recruitment and retention. The benefits are so back loaded and tied to longevity, that the dollars spent on retirement are often not valued because they are not seen by potential employees. Many individuals may never enter the profession if they know they may not be able to dedicate 25 or more years within one system because they can receive more balanced compensation in a different sector. Teachers who move between states, while still dedicating their life to teaching, receive far less in retirement benefits even though they educated just as many students for just as long as teachers who spend their entire career in a single state. Further, our systems need to attract highly effective teachers who can produce great results, especially in high-needs schools, whether or not they are prepared to make a career-long commitment or only teach for shorter periods of time.  A defined benefit pension system does not grant shorter-term teachers the same pension wealth per year of teaching as a teacher who was able to teach longer in a different assignment.

In addition, the state's pension plan still does not treat fairly those teachers that enter the field later in life compared to those that entered the system earlier. If two teachers of different ages at the point of retirement have the same amount of service and earn the same monthly retirement benefit, the younger one will have a much higher pension wealth (see Goal 4-I).