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Teacher-Pension Systems Flagged as Cause for Alarm

UPDATED

Forty states have made dozens of changes to their teacher-pension systems in the past four years, but those changes largely fail to deal with longer-term structural problems—and actually come at teachers' expense, contends a report issued today by the Washington-based National Council on Teacher Quality.

Many of the alarms it raises have been discussed in other policy papers and reports that have raised red flags about public-pension shortfalls, which may be even worse than estimated given what some see as the plans' shaky actuarial assumptions. But this report makes a special note of saying that teachers themselves have been negatively affected by the short-term fixes. For instance, since 2008:

  • 22 states have lowered cost-of-living increases;
  • 25 states have increased retirement ages for teachers;
  • 20 have lengthened the number of years used in the benefits calculation;
  • 13 states have changed multipliers used in the benefits calculations in order to lower payouts;
  • 27 states have raised teacher contributions; and
  • 21 states have reduced benefits and increased contributions.

Three quarters of those changes were made in 2011-12 alone, the report underscores. And while some of them may have been necessary, most of the fixes haven't dealt with long-term sustainability issues or how the pension systems themselves affect the labor market.

The comprehensive analysis is sure to kick up discussion and debate. Few topics are more volatile than teacher pensions and disagreements about whether "defined contribution" (think 401(k)-type plans in which recipients make investment decisions) or "defined benefit" plans (which guarantee a set income based on a formula) are better for teachers and more fiscally responsible. The rules governing them are obscure, ill-understood, and quite complicated.

That has never stopped your favorite teacher-beat reporters from digging in, though, so if you want some background before picking up this dense report, try reading Education Week's pieces on several of these issues, including the lack of pension portability, the "push" and "pull" on teachers' retirement decisions, and "double dipping."

Here is a rundown of some of the report's findings:

Unfunded liabilities: Unfunded pension liabilities amount to some $324 billion; New York and the District of Columbia's alone are solvent, while Indiana, at just 44 percent funded, is the least funded. On average, the systems are only 73 percent funded. Added to that are the costs of retiree health-care benefits for public employees (including teachers), which amount to some $660 billion more.

Inequitable rules: One of the report's big criticisms is those plans that let teachers retire after a certain number of years of service, rather than based on a specific age. This, the report says, is both costly and unfair to teachers because those with the same number of years of service wind up with vastly different total compensation. For example, Montana's pension system allows some teachers to retire as early as age 47; those teachers would collect half a million in pension wealth before even reaching age 65, unlike a teacher who began teaching as a second career—or took time off—and qualified for retirement at a more reasonable age. The 10 states that have pegged retirement to traditional retirement age save about $450,000 on average per teacher.

Warped labor market: Pension systems warp the labor market in unusual ways, potentially pushing out effective teachers at certain ages and making the profession less attractive to younger candidates. EdWeek has written about those issues here and here.

Long vesting: Teachers on average have to wait 6 1/2 years to vest in their pensions, up from fewer than six years in 2009, due to increased vesting periods in 11 states. And 15 states make teachers wait at least 10 years to vest.

Lack of portability: Teachers who move to other states typically are enrolled in new states' pension programs, and are unable to carry over prior years of work experience, thus jeopardizing thousands in potential pension wealth.

Higher teacher costs: 27 states raised the amount teachers must pay into their systems, between 2008 and 2012; the greatest increase is in Michigan, whose increase of 5 percent of salary amounts to an average of $2,870 more per teacher per year. The NCTQ calls 28 states' requirements "excessive," because they are more than the 10 percent to 15 percent of salary that financial analysts typically recommend people to save.

Inequitable burden: The changes states have made almost always reduce benefits for new teachers, while preserving them for veterans. (Though it's not stated in the report, this could account for why teachers' unions—typically dominated by veteran teachers—have been more willing to concede on smaller pension fixes but fought structural ones, like shifting from defined-benefit to defined-contribution plans.)

Among other things, the report recommends that states, policymakers, and unions:

  • Give all teachers the option of a portable, defined-contribution pension plan;
  • Consider "cash balance" plans that reduce investment risk for teachers associated with defined-benefit plans, while guaranteeing a rate of return (more about such plans in this EdWeek article):
  • Properly make scheduled payments to existing pension systems;
  • Institute safeguards so politicians can't raid pension funds, or make unrealistic, "politically expedient" changes to them;
  • Make the systems' retirement dates contingent on age rather than years of service, and make pension wealth accrue in an equitable way across eligible years.

UPDATE, 12/13, 10:55 a.m.: I asked the National Education Association to comment on the report, and received a statement back from its president, Dennis Van Roekel. While the NEA disagrees with the NCTQ's call for a shift to defined-contribution plans, it agrees that underfunding is a problem. "Educators contribute to their pension plans with every paycheck, and they never miss a payment. But some politicians haven't held up their side of the deal and refuse to pay their contributions," Van Roekel said.

Funding for the report came from the Bill & Melinda Gates Foundation and the Joyce Foundation; they also support EdWeek coverage of business and teacher quality, respectively.

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