Pension Sustainability: New Jersey
Pensions Policy
Analysis of New Jersey's policies
As of June 30, 2015, the most recent date for which an actuarial valuation is available, New Jersey's pension system for teachers is 51.1 percent funded, a decrease of 5.9 percentage points since NCTQ's last report. Its current pension debt is almost $20,000 per pupil throughout the state. It also has an amortization period of over 30 years. This is due to an accounting method, however, in which New Jersey uses an open 30-year amortization period, meaning that the amortization period is reset to 30 years every year. Thus, the unfunded liability is never fully amortized. Under a closed amortization method, if the plan earns its assumed rate of return and makes its full actuarially determined contribution payments, it would take the state over 30 years to pay off its unfunded liabilities. The state will not employ a closed amortization schedule until June 30, 2019. Neither the state's funding ratio nor its amortization period meets conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks.
New Jersey, however, does not commit excessive resources toward its teachers' retirement system. In fact, the employer and state contributions are excessively low because they have not made the actuarially determined contributions. Only 40 percent of the statutory contribution amount was appropriated for FY 2017. Thus, the state is not making the contributions required by its own state law. The mandatory employee contribution rate of 7.06 percent is reasonable. Over the next seven years, the employee rate is set to increase to 7.5 by July 1, 2018, which is still reasonable, but close to excessive in light of the fact that teachers must also contribute 6.2 percent to Social Security.
Recommendations for New Jersey
Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded and had an amortization period of 30 years or less to allow more protection during financial downturns. The state should also not delay using a 30-year "closed" horizon for amortizing its debt rather than its current 30-year "open" amortization method so that the burden of paying today's promises is not put off onto future generations. Furthermore, New Jersey should at minimum make the contributions required by its own law, though ideally the state would make the actuarially required amount.
State response to our analysis
New Jersey was helpful in providing information that enhanced this analysis.
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Delivering Well Prepared Teachers
- Admission into Teacher Preparation
- Elementary Teacher Preparation
- Elementary Teacher Preparation in Reading Instruction
- Elementary Teacher Preparation in Mathematics
- Early Childhood
- Middle School Teacher Preparation
- Secondary Teacher Preparation
- Secondary Teacher Preparation in Science and Social Studies
- Special Education Teacher Preparation
- Special Education Preparation in Reading
- Assessing Professional Knowledge
- Student Teaching
- Teacher Preparation Program Accountability
Expanding the Pool of Teachers
Identifying Effective Teachers
- State Data Systems
- Evaluation of Effectiveness
- Frequency of Evaluations
- Tenure
- Licensure Advancement
- Equitable Distribution
Retaining Effective Teachers
Exiting Ineffective Teachers
Pensions
Research rationale
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.
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.