Too Many Teachers Get Zero Benefit From Retirement Plans, Report Says
The days when new teachers could expect to take low pay in exchange for a respectable retirement package are long gone, according to a new report. Today, many new teachers can expect low pay with lousy benefits.
What's more, new teachers nowadays contribute a portion of their low pay to pension plans that will probably be worth less upon retirement than what the teachers contributed while they were in the classroom, according to the report.
"Let's say you contribute 8 percent of your salary for three years and you decide to leave," says Dara Zeehandelaar, the national research director at the Thomas B. Fordham Institute, the conservative-leaning think tank that issued the report today. "You can get that money back, but think of how much better it would have been for you if you could have put that money in a 401(k) or even in a traditional savings account."
"(No) Money in the Bank: Which Retirement Systems Penalize New Teachers?" looks at how long teachers in the largest district in each state and in the District of Columbia must wait until their pension value exceeds their own contributions. The short answer: Teachers in more than half of the 51 districts wait 25 years before their retirement benefit is worth more than the total of their own contributions.
Many teachers, of course, will never see a benefit since most teachers don't stay that long. Seventy-two percent of teachers will leave the profession before putting in 20 years on the job, according to the report.
So what's happening to new teachers' retirement contributions? Districts are using them to pay retired teachers' pension plans. A study cited in the report found that more than 10 percent of current teachers' earnings is used to pay for "previously accrued pension liabilities." (Emmanuel Felton wrote in the Teacher Beat blog about three states states—Kentucky, Michigan, and Maryland—that are grappling with underfunded pension systems.)
"This is not a good idea," says Zeehandelaar. "You, as a new teacher, are subsidizing pension obligations for current and retired teachers. You really are better off putting your money in a [401(k)-type plan] if you have any plans to change careers, to move, or to not stay in teaching for 35 years."
Only six of the districts studied had 401(k)-style plans, where a teacher's contribution grows through earned interest and employer contributions from the very beginning. The six districts offering 401(k)-style plans are Anchorage, Alaska; Miami-Dade County, Fla.; Detroit, Mich.; Columbus, Ohio; Greenville County, S.C.; and Alpine, Utah.
Six of the districts studied offered hybrid plans—a mix of pension and 401(k)-type options. Under these plans, teachers must vest into the pension portion, but they are always eligible to get the total 401(k)-type investment earnings. These teachers begin to see a return on their investment after a median of 10 years.
How should states address the problem?
The author suggests that states offering only traditional pensions should add a 401(k)-type option and let teachers choose which plan best suits their career goals.
But some argue that 401(k)-type plans contribute to turnover, since teachers are eligible to take their contributions, plus interest earnings, with them whenever they leave the profession. The deferred benefit of the traditional pension plan, on the other hand, entices teachers to remain in the profession longer. According to the report, there's not much evidence to support either of these claims.
For states that offer more than one retirement option, the author suggests making the more portable one the default. Currently, in all states that offer retirement plan choices, the traditional pension plan is the default option. Considering the high turnover rate of new teachers, the author writes, it makes more sense to automatically enroll them in a plan that doesn't require them to remain in the profession for decades before seeing any benefits.
The author's final suggestion is for states to reduce benefits and increase salaries in order to attract new teachers to the profession. This would suit today's generation of young teachers, who are more mobile and much less likely to stay put long enough to see their pension benefits begin to work for them, the author writes.
Here are some key findings:
- In 39 districts with traditional pension plans, teachers waited a median of 27 years before their pension total exceeded their own contributions. In only five districts with traditional pension plans did teachers see a return on their investment in less than 20 years.
- In 34 districts with traditional pension plans, about 3 in 4 teachers will leave the profession before accruing any benefit from their retirement contributions.
- In three districts—Chicago, Boston, and Anoka-Hennepin in Minnesota—teachers' pensions will never be worth more than the money they put in themselves.
- Eighty-nine percent of U.S. teachers are enrolled in traditional pension plans. Only 9 percent participate in a 401(k)-style plan.