Most Teachers Won't Have Enough Retirement Savings Under Pension Plans, Study Finds
Teachers who plan to stay in the classroom and work in the same state for their entire career will have a steady stream of income for the rest of their life. But those who leave the profession sometime before the 30-year mark, or even change states, won't have enough saved to retire comfortably.
That's according to a new study from the Bellwether Education Partners, an education nonprofit group. State pension plans are leaving all but the longest-serving teachers without adequate retirement savings, the study found.
The study estimates that 81 percent of teachers who start working at age 25 will fail to qualify for adequate retirement benefits under a typical defined-benefit pension plan.
Most experts recommend that people save at least 10 to 15 percent of their annual income toward retirement, in addition to Social Security, the study says. With that savings plan, people can retire and maintain a similar standard of living.
But most teachers participate in defined-benefit pension plans, which offer teachers a specific payout upon retirement based on a formula, rather than by investment returns. The formula takes into account the teachers' final average salary and the number of years served. According to the study, pension wealth spikes at 33 years of experience—and in the first two decades of a teacher's career, the plans offer little retirement savings.
In most states, teachers become vested—meaning able to withdraw their employers' contributions—in their pension plan five years into their career. But a sizable number of teachers leave the profession before they become vested. (Education researcher Richard Ingersoll estimates that 44 percent of new teachers quit within five years.)
And Chad Aldeman, a principal at Bellwether Education Partners and an author of this study, said even after teachers are vested, "it can take 25 years before the pension is worth more than the teacher's contribution."
Also, pensions are not always portable, so teachers who move states at some point in their career will lose out on retirement savings, Aldeman said. He also noted that teachers in 15 states are not eligible for Social Security.
For those teachers who don't accumulate adequate retirement servings, they'll need to increase their savings rate later on, work longer, rely on family or governmental support, or live a more modest lifestyle in retirement, the study says.
Other Pension Plans
About 85 percent of teachers are enrolled in a defined-benefit pension plan, according to U.S. Department of Labor data. But there are some alternatives.
About 8 percent of public school teachers are enrolled in defined-contribution plans that are based on individual investment decisions—like the 401(k) account common in the private sector. The study says that Alaska is the only state that has a mandatory defined-contribution plan for teachers, but five other states offer that plan as an option for teachers.
Those plans would help teachers reach adequate retirement savings much earlier, the study found. There is no large spike of benefits at any particular age, so teachers would have at least minimally adequate savings as soon as their plan vested. Just 48 percent of teachers would end up with inadequate retirement savings under this plan, as opposed to the 81 percent with defined-benefit pensions.
Another five states automatically enroll new teachers into hybrid plans, which include a mix of the defined-benefit and defined-contribution components. The study estimates that it would take a teacher 25 years to qualify for adequate retirement benefits with a hybrid plan—slightly less time than with the defined-benefit plan, but still leaving 78 percent of teachers with inadequate savings.
Finally, some states have transitioned to "cash-balance" plans, which are a type of defined-benefit pension that guarantees employees a rate of return on their investments. Kansas, for example, has been enrolling all teachers hired after 2015 into one of these plans.
Under cash-balance plans, teachers would have minimally adequate savings as soon as their plan vested. About half of teachers would still have inadequate retirement savings.
Another factor with defined-benefit pension plans: They're expensive for states. As of now, pension debt for teacher plans tops out nationally at more than $516 billion, and states such as Connecticut, Illinois, and Michigan project they won't have enough money within the next decade to pay teachers what they're owed at retirement.
Aldeman recommends states make significant reforms to their existing defined-benefit pension plans—changing the way benefits are calculated. Or, a simpler option might be for states to transition to a new pension system, like a cash-balance plan or a hybrid plan. He stressed that these recommendations would be for new teachers—and would not affect current or retiring teachers.
Still, making changes to pension systems can be politically risky. In Kentucky, teachers shut down schools three times last year with the "pension flu"—an orchestrated sickout to protest proposed changes to their pension plan. (The state, which has the worst-funded retirement system in the nation, ultimately set up a cash-balance plan for new teachers, but made no changes to benefits for retired or current teachers. The state Supreme Court struck down the law in December because of how the legislation was introduced and rushed through the process in just a day.)
This year, Kentucky lawmakers have weighed similar changes again—and a handful of school districts have already been forced to close up to four times as teachers called in sick to protest proposed pension reform, among other legislation.
The state teachers' union has come out against the changes, saying that the structure of the pension plan isn't the problem—the amount of state funding is. But Aldeman said defined-benefit pensions plans are still flawed for most teachers.
"That is sacrificing the future to keep a structure that is not working," he said. "It would be better to look at how we could envision the structure going forward to protect everyone."
Chart via Bellwether