July 30, 2015

Are Pension Refunds the Same as a 401k?

By Bellwether

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*Cross posted from Teacherpensions.org’s blog.

Over half of new teachers won’t meet the minimum vesting or service requirements to receive a pension. One common response is that these teachers are allowed to receive a refund on their contributions plus interest, and that the refund is comparable to private sector workers who receive a 401k. It’s a good point, but it’s not exactly the case for all teachers.

While it’s true a teacher can get a refund on her pension contributions plus interest in some states, like California, in other states, like Illinois, teachers do not receive interest. In fact, in Illinois, teachers receive less than their original employee contributions. An Illinois teacher is required to contribute 9.4 percent of her paycheck to the state teachers’ retirement system. Upon leaving the classroom, however, she is only entitled to a refund equal to 8.4 percent of her earnings. And, in the majority of states, teachers do not receive any portion of their employer’s contributions.

Overall, state public retirement systems face significantly less scrutiny from the federal government than the private sector. Unlike the private sector, states are not required to provide their public workers with Social Security, can set their minimum vesting requirements upwards of 10 years, and aren’t held to the same funding standards. So California teachers may be able to get a full refund with 4.5 percent interest, but they also won’t get Social Security. For teachers in Illinois, they receive neither a full refund on their pension contributions nor Social Security for their time in the classroom.

Participating in the state systems may be good for a select few, but for the majority of teachers, it comes with too many trade-offs.

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