Pension Flexibility: Vermont
Pensions Policy
Analysis of Vermont's policies
Vermont 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 five 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.
Teachers in Vermont 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. Vermont's vesting at five years of service limits the options of many teachers who leave the system prior to this point. According to a recent report, only 35 percent of employees in Vermont's teacher-covered pension plan vest, meaning that 65 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions.
Teachers in Vermont who choose to withdraw their contributions upon leaving only receive their own employee contributions. This means that those who withdraw their funds accrue fewer benefits than 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.
Vermont 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. Vermont's plan allows teachers to purchase time for previous teaching experience, up to 10 years of total purchased time for all non-military categories. While better than not allowing any purchase at all, this provision disadvantages teachers who move to Vermont with more teaching experience or who want to purchase time for a variety of reasons. The state's plan allows teachers to purchase time for approved leaves of absence, including maternity or paternity leaves. In addition, the state allows teachers to purchase up to five years of "air time" for any reason once they have 25 years of service. Total credit purchases, however, may not exceed 20 years.
Vermont is commended for offering teachers access to two fully portable supplementary savings plans: a 457 plan and a 403(b) plan. The state provides a tax-deferred savings plan known as the Supplemental Retirement Plan (SRP). Contributions are made on a voluntary basis, are tax-free, and contain no employer contributions. Earnings from investment are deferred until withdrawals are made.
Recommendations for Vermont
Offer teachers a pension plan that is fully portable, flexible and fair.
Vermont 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 Vermont participate in Social Security, they are required to contribute to two defined benefit-style plans.
Increase the portability of its defined benefit plan.
If Vermont maintains its defined benefit plan, it should allow teachers that leave the system to withdraw employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.
Offer an employer contribution to the supplemental retirement plan.
While Vermont at least offers teachers the option of a supplemental defined 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
Vermont did not respond to repeated requests to review this analysis.
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Vermont
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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.