Pension Flexibility: Pennsylvania

Analysis of Pennsylvania's policies

Pennsylvania only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is not fully portable, does not vest until year 10, and does not provide any employer contribution for teachers who choose to withdraw their account balances when leaving the system. It also limits flexibility by restricting the ability to purchase years of service. Pennsylvania does offer a choice of "classes" within its defined benefit system. The only differences between the classes are the contribution and benefit rates; the class with a higher mandatory employee contribution rate has a higher benefit multiplier. While offering choices within a retirement system is commended, Pennsylvania still only provides a defined benefit plan with high contribution rates (see Goal 4-H).

Teachers in Pennsylvania 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. Teachers in Pennsylvania hired prior to July 1, 2011 vest at five years; vesting has been raised for teachers hired after that date to year 10.  Teachers who leave the system prior to these points have limited options.  

Many teachers in Pennsylvania will leave the system before they reach 10 years of service. Non-vested teachers with less than five years of service who choose to withdraw their contributions upon leaving only receive their own employee contributions. Nonvested teachers with at least five years of service receive their employee contributions plus accumulated interest. This means that those who withdraw their funds accrue fewer or at most 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 accounts 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.

Pennsylvania 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. Pennsylvania's plan allows teachers with one year of service to purchase time for previous teaching experience, up to 12 years. While better than not allowing any purchase at all, this provision disadvantages teachers who move to Pennsylvania with more teaching experience. In addition, the mandatory one year of service before purchasing previous service makes the purchase cost slightly more expensive. The state's plan does not allow for the purchase of maternity or paternity leaves, which is a severe disadvantage to any teacher who needs to take leave for parental care or for other personal reasons.

Citation

Pennsylvania Public Employees' Retirement System, Active Member Handbook http://www.psers.state.pa.us/publications/active/activehandbook.htm

Recommendations for Pennsylvania

Offer teachers a pension plan that is fully portable, flexible and fair.
Pennsylvania 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 Pennsylvania participate in Social Security, they are required to contribute to two defined benefit style plans.

Increase the portability of its defined benefit plan.
If Pennsylvania maintains its defined benefit plan, it should allow all teachers that leave the system to withdraw employee contributions with interest plus matching 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, 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 Pennsylvania 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

Pennsylvania recognized the factual accuracy of this analysis.