Teacher pensions and perverse (dis)incentives

We’d be remiss not to urge upon our readers this excellent article in Education Next  by Chad Aldeman, a principal at Bellwether Education Partners, and senior analyst Kelly Robson.

The article parses the authors’ research into teacher pension plans in all 50 states into how pension plans do, or better yet don’t, provide teachers with incentives to stay in the profession. That’s one of the major selling points of generous, defined benefit public sector retirement plans:

Defenders of the defined-benefit structure also argue that it can encourage teachers to enter and remain in the profession over the long term, because to maximize their future pension wealth, they must accrue the maximum years of service and reach the top of their district’s pay scale. In a typical teacher pension plan, retirement wealth accumulates over time and is tied closely to a teacher’s average salary in her last few years on the job.

In reality, though,

In the median state, less than half of all teachers are expected to work long enough to vest in their retirement plan—meaning that despite big spending and promises, less than half of all public-school teachers, on average, will ever receive retirement benefits for their years on the job.

…this means that our significant investment in pensions is not affecting the retention decisions for large groups of teachers.

Only about 40 percent of teachers in Colorado PERA will stay in teaching long enough (five years) to vest in the plan. This means when they leave, they’ll have accrued the money they contributed and some interest, but none of the employer’s contribution that sweetens the pot considerably.

Something’s awry, the authors conclude:

Current teacher pension plans are neither improving the workforce nor providing teachers with adequate retirement savings. Schools are investing billions of dollars in teacher pensions, but they’re getting little return in the way of retention incentives. Meanwhile, teachers are accepting lower base salaries today in exchange for the promise of future retirement benefits, a promise that only a fraction of teachers will ever realize. That disconnect means current teacher pension plans are not working well for teachers, schools, or students.

What recommendations do the authors make for addressing this?

There are several different options for teacher retirement benefits that could deliver more equitable benefits on a cost-neutral basis. Well-designed, individual portable retirement accounts (somewhat like a 401(k) plan), hybrid plans that combine traditional pension plans with a 401(k)-like component, or alternative models called cash-balance plans that guarantee a moderate interest rate could all provide sufficient retirement savings while giving teachers greater job flexibility. Such a change would protect any teachers who left, regardless of reason, while still providing sufficient benefits to those who choose to stay for a full career.

The article is well worth reading in its entirety. Meanwhile, it will be interesting to see how close Colorado PERA comes to matching any of the above recommendations when it concludes its much-vaunted listening tour later this summer. Our bet: Not very.


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