Pension Flexibility: Pennsylvania
Pensions Policy
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 pension sustainability goal).
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. 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. Teachers in Pennsylvania after July 1, 2011 vest at ten years. 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. According to a recent report, only 25 percent of employees in Pennsylvania's teacher-covered pension plan vest, meaning that 75 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions. By law, interest is not credited to accounts of non-vested members. Thus, teachers with less than ten years of service who choose to withdraw their contributions upon leaving only receive their own employee contributions without interest. Vested teachers receive their contributions with 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.
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. 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.
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. As the sole option, however, 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 was helpful in providing information that enhanced this analysis. Pennsylvania added that there are some limitations on time frames and amount of service that can be purchased, but active members may purchase prior teaching service and service for approved leaves of absence.
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Pennsylvania
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Pensions
Research rationale
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.
Pension Flexibility: 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.