July 10, 2017

Pensions Are Expensive But Not Generous

By Bellwether

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This week Eduwonk features guest posts from different members of Bellwether’s Policy and Thought Leadership team who lead some of our most impactful work. The post below is by Chad Aldeman.

In our work on teacher pensions, we spend a lot of time explaining one major contradiction: Teacher pension plans today are tremendously expensive, but they’re not that generous for the average teacher.

Nationally, states and districts are contributing about five percent of each teacher’s salary toward actual retirement benefits. For most workers, that would be the equivalent of a five percent match into their 401(k) plan. That’s slightly better than a typical private sector 401(k), but it’s certainly not an outrageously generous contribution.

But teacher pensions have three unique features that distort this reality. One is that 90 percent of teachers are enrolled in defined benefit pension plans where contributions are not strictly tied to benefits. That is, the plans make promises to pay out benefits in the future, but if the plans fail to save enough to pay for those promises, or if the plan’s assumptions about how much they need to save turn out to be flawed, the plan will take on “unfunded liabilities” that function like debt. These debt costs have soared in recent years; in response, teacher pension contribution rates have risen dramatically even as the value of teacher benefits have gone down.

The graph below shows total state and district contributions toward teacher retirement plans, broken down by whether they’re going toward actual retirement benefits or debt costs (these don’t include teacher contributions, which have also risen in recent years). In the average state, employers are contributing about 16 percent of teacher salaries toward pension plans, but less than a third of that (five percent out of the 16) is going toward actual benefits.

The second reason pensions are often perceived as generous is because the five percent going toward benefits is not distributed evenly. Unlike an employer match into a 401(k) plan, where everyone gets the same percentage of their salary matched into their own account, in pension plans the five percent is the average across all different workers. Those who stay in the same plan for a full career will earn benefits far above that amount, while the many teachers who only serve for five or ten or 20 years earn far less than average.

Third, the five percent contribution today represents an average across all employees, regardless of when they started, but states have cut benefits significantly for new workers.

As the graph above helps illustrate, multiple things can be true at once: States are contributing a lot of money toward teacher retirement costs, but teacher retirement plans, on average, are not that generous. Alternative plan designs could be more portable, more equitably distributed, and no less generous.

For more on how well state pensions plans serve the unique needs of their teachers, check out our recent rankings here.

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