Education is awash in rhetoric and sloganeering – often wildly divorced from the evidence. An interesting aspect of the teacher pension issue is how much these large and complicated retirement systems bump up against much of the rhetoric we commonly hear in the teacher quality debate. Here are three ways and some basic ideas about fixes.
Turnover is bad! Teacher turnover is an evergreen concern. You, of course, want some turnover in any high-performing organization but too much is disruptive and costly. But while we hear a lot of concern about turnover – especially from the teachers unions – no one bothers to mention that today’s teacher pension systems are dependent on turnover to survive. The basic math of pension systems is that a lot of small losers (people who leave before vesting or collecting end of career benefits) pay for the benefits of those few who survive (pdf).* At the extreme in states like Colorado only 13 percent of teachers earn full benefits. Nationwide only about one in five teachers achieves that mark. If a lot more teachers persisted these pension plans would crack financially. They need the turnover to survive. They count on it. To be clear, I’m not saying they encourage it, just that they need a fair amount of turnover to function.
Veteran teachers are best! There is a lot of rhetoric about veteran teachers but the data show that while the returns to experience are important to a teacher’s growth they level off after a few years. Nonetheless, the wisdom and experience that 25 and 30 year veterans can bring to schools is very valuable and schools should cultivate effective veterans – especially those who want to continue giving to kids. Yet because of the way teacher pension systems work once someone earns full benefits it becomes economically against their interest to remain in the system. The data show that people respond to this incentive and retire. In other words, despite all the rhetoric about valuing veteran teachers today’s teacher retirement schemes are largely set up to push them out after a certain period of service – and despite whether they still want to teach or their school or district wants them to stay on.
Social Security is sacrosanct! Social Security demagoguery is a pretty effective political tactic and teachers union leaders are pretty good at it. But rarely is it mentioned that 40 percent of America’s teachers are not covered by Social Security. Adding to the retirement insecurity that today’s pension systems create for teachers, teachers in states or districts that do not participate also lose out on this portable and progressive social insurance program. Adding to the perversity, the reason some places don’t participate is because doing so is a bad deal for high-income earners (which teachers are not). I was talking with a state teachers pension fund leader recently who said they were against participating because their state would be sending more money to Washington than it gets back because it has so many high-income earners. OK, but that progressively is part of what makes Social Security important and it would still be good for their members, and whatever happened to all this concern over the middle class working class Americans?
How to address these issues?
There is no single way but here are some guideposts:
Pension systems are based on a very uneven accrual of benefits, the last few years matter a lot, the years leading up to that not so much. Smoothing out the accrual curve and making benefits more portable would help reduce the savings penalties many teachers face. Enrolling teachers in Social Security would – while not a substitute for a good retirement system – add another leg to the stool for the teachers who are not enrolled and help with the portability issue. And more transparency is a must so people understand how the system affects them and policymakers can understand when perverse incentive are built in.
*Important to note that this is not just a problem for people who only teach a few years. For instance a 30 year veteran with fifteen years of service in two separate states is adversely affected as well.
The Federal government pension system FERS could really be a model for future teacher pension systems. It’s really a 3-legged system that combines a traditional pension, social security, and a 401k style individual savings program. Most teachers would be far better off under such as system compared to the current systems in most states.
The Federal government basically shrank it’s traditional pension to 1/2 of its previous size when they switched to the FERS system. The traditional pension wasn’t eliminated but under the new system the multiplier was reduced to about 1% so someone working for 30 years is going to earn a pension of about 30% of their highest 3-years average salary. This means Federal employees get a modest pension that supplements social security rather than replaces it. Doing something similar at the state level would allow states to get their traditional pension costs under control without abandoning them.
Adding teachers to social security is a complete no-brainer. Especially give the windfall elimination provisions in social security (WEP) http://www.socialsecurity.gov/retire2/wep.htm that cut back social security benefits of employees who spend part of a career teaching and part of a career doing some other job that pays into social security. This would also greatly increase portability for employees who want to leave teaching mid-career, move to another state with a different system, and for those who want to get into teaching mid-career. I expect the real reason why districts don’t want to do social security is the increased payroll costs will affect their budgets.
Finally all teachers should have access to top quality 401k or 403b style savings programs. We have that here in Texas because teachers can self-invest with Vanguard or Fidelity. But not all teachers have that option. Encouraging districts to do partial matches would also help encourage teachers to take advantage.
As a teacher who got into the profession at age 42 after a career in another field, I would be much better off if teaching was more like this and I could continue to accrue social security benefits during teaching. As it is, my previous 20 years of social security work history will actually be slashed due to the WEP and going into teaching was actually a bad move financially due to the retirement issues. I did it anyway but that shouldn’t have to be the case.
Good points and the federal system is a good model to look at. The WEP rules are really windfall reduction rules not elimination. And while people hate them they’re important to preserving the progressive nature of Social Security (but wouldn’t be an issue for teachers if they were all in Social Security in the first place).
Interesting data point per your last graf – the turnover issue looks about the same for people entering at different ages, so this is more of a retirement security issue than a young teacher one. Putting older people into an insecure system just increases the stakes for them.
In other words the FERS system is better because works receive a lower retirement and taxes can be lower for the rich. And with a defined benefit plan workers take on the risk so hedge fund managers, mutual fund managers and captains of finance can skim off fees and profits that would have previously gone to the retiree. Is that right?
I ment defund contribution, not benefit.
Are we assuming that teachers can change districts or states without penalty?
Are teachers really state workers or merely, workers for corporations?
What does it mean for a society to invest in teachers?
I ment defund contribution, not benefit.
I’m new to this information (I’m currently a teacher in New York City), and I don’t understand this statement:
“Yet because of the way teacher pension systems work once someone earns full benefits it becomes economically against their interest to remain in the system.”
Could someone explain this to me?
In addition, I have a Tax Deferred Annuity retirement account that I contribute to. What is the difference between that and a 401K? Is it just that my employer doesn’t do any matching?
Thanks!
You have a TSA probably Google 403B. That quote suggests that some teacher retirement systems a too generous and allow some who begin teaching at a young age to retire around 55 or 60. But it really isn’t a problem. I don’t know what she was getting at with that statement.
Thanks David!