Americans are struggling to save for retirement at a time of still-high unemployment rates, rising college costs and stagnant wages. For many workers, individual circumstances lead to inadequate savings. But for public school teachers, poorly structured retirement policies hinder their future security.
At more than 3 million, teachers are the largest class of U.S. workers with a bachelor’s degree or higher. Unfortunately, policymakers are undermining the future retirement security of this large and important group of workers. In our recent paper, “Friends Without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security,” we used pension-plan assumptions for all 50 states and the District of Columbia to estimate that, in the median state, more than half of all teachers won’t qualify for even a minimal pension. Fewer than one in five teachers will work a full career and reach the pension plan’s “normal retirement age.” Most will leave their public service with little retirement savings.
This story doesn’t fit with the popular perception of teacher pensions as more generous than private-sector retirement benefits. That’s because the real story of teacher pensions today involves a small number of relatively big winners and a much larger group of losers.
For instance, in Maryland if you teach for a full career you can expect to earn a pension worth about $3,297 a month, nearly $40,000 a year, plus adjustments for cost of living. But only a quarter of Maryland’s teachers will stay a full career and earn that benefit. According to Maryland’s estimates, 57 percent will leave without a pension benefit at all.
For all those teachers who don’t stay for a full career in Maryland — or most states — this savings penalty can make the public-sector benefits worse than those offered in the private sector. Under federal law, private-sector employees must be eligible to retain some portion of their employer’s retirement contributions once they’ve been employed for three years and 100 percent of their employer’s contribution within six years.
In contrast, 17 states, including Maryland, Illinois, Michigan and New York, withhold all employer contributions for teachers until 10 years of service. “Vesting” is an important milestone, but it guarantees only a minimum pension in retirement. The largest rewards go to those who remain in the system for 30 or more years, something few workers do today.
Long vesting periods help state legislators and governors who have failed to properly fund their state’s pension plans. Extending the amount of time it takes for a teacher to qualify for a pension reduces the number of teachers who will qualify. During the recent recession, 12 states lengthened their vesting period to help address funding shortfalls. It saves money, yes, but it does not help teachers.
For early- and mid-career teachers, many of whom are just beginning to save for retirement, the savings penalties can be large. Last year, Maryland districts put a sum equal to 13.3 percent of each teacher’s salary into the pension fund. But in Maryland and 48 other states, teachers who leave their jobs before vesting never get any of the contributions the employer made on their behalf. That money stays with the fund and finances the pensions of those who remain. So take a hypothetical teacher earning $40,000 who leaves her job after one year —or five years or nine: She would forfeit $5,320 for every year she worked, not including whatever interest she could have earned on that money.
Those dollars are the retirement savings foundation for young teachers at a time when Americans are being told to be increasingly self-reliant for retirement income. Accounting for compound interest, a Maryland teacher who leaves the profession at age 30 after five years would lose more than $150,000 in potential retirement wealth.
Though some states have responsibly funded their pension obligations, others face substantial shortfalls. Overall there is at least a $390 billion gap between what states have saved for teacher pensions and what they have promised to their workers. States face much larger shortfalls for health-care obligations to retirees.
Except among ideologues, there’s no ideal solution to these problems, and every remedy carries trade-offs. Well-designed 401k-style plans, hybrid plans that combine traditional pension plans with a 401k-like component or alternative models called cash-balance plans, which guarantee a moderate interest rate, could provide sufficient savings and give teachers greater job flexibility. At a minimum, states should ensure that teachers can take with them their own contributions, a share of the interest those contributions accrued and some share of the employer contributions made on their behalf.