If This Is “Gold-Plated”…

Yes, a few teachers get really nice pensions. But more than half get no pension at all. A response to Richard Vague.

By Andrew Rotherham Chad Aldeman

Tagged Pensionsteachers

As Richard Vague previously wrote in this space, state and local governments are being forced to cut spending on  schools and infrastructure in order to pay for rising pension costs. Vague shows the data behind these unfortunate trends, and offers some radical solutions to our under-funded public sector pensions, including the ones covering 90 percent of all public school teachers. But there’s another reason policymakers should pay attention to those plans: Traditional pension plans simply don’t work that well for the majority of teachers. Lost in all the attention to the cost of teacher pensions is the more fundamental design problem. Traditional pensions are a lousy fit for today’s teacher labor market.

The design problem is overlooked because there is a lie, or perhaps more charitably a myth, at the heart of the debate about teacher pensions. “Teachers get “gold-plated” pensions,” argue critics and some conservatives. “Pension reform is a scam intended to take away the good pensions teachers get,” counter the teachers’ unions. The hyperbole obscures a harder reality: Teacher pensions aren’t gold plated. In fact, they’re not very good for most teachers at all.

Like most durable myths, this one contains a kernel of truth. Current teacher pension plans work pretty well for a small group of winners: the fraction of teachers who stay in one pension plan for their whole career. In other words, those who teach in one place for two or three decades. These teachers earn a steady stream of income, adjusted for inflation as they age, that’s guaranteed to last their entire lifetime. For these winners, the incentives and structure of pension plans can drive them from the classroom even when they still have more to give, because after a certain threshold, every year they continue working is a year they forfeit pension payments. This “push-out” effect is a loss for them, and for parents and students, but, overall, the system works okay financially for this group. So, for example, a 30-year veteran in Des Moines, Iowa who’s making $62,000 might be in line for a guaranteed pension worth $37,000 a year, plus Social Security benefits. That teacher’s not exactly worried about a tax increase for private plane ownership, but she should be able to afford an adequate retirement.

But we’re not talking about most teachers here, or half, or even a plurality. No, we’re talking about fewer than one in five teachers. These “pension winners” receive the vast majority of attention, positive and negative. Public-sector advocates point to these cases as examples of public servants who are well compensated for their years of service. Where proponents see the financial security of this arrangement, critics decry the generosity or envy the fact that few private-sector workers have comparable retirement benefits.

But hardly anyone talks about the rest of America’s public school teachers, the other 80 percent, who do not earn full pensions. Or about the more than half of people who teach and never qualify for any pension at all. They, too, may dedicate their life to education and kids, but because they have a spouse who moves for their job, a partner in the military, or they move for whatever reason to a different state, they cannot accrue the decades of service in the same pension plan that are necessary to earn full pensions.

And then there are all the teachers who leave after some period of time because they decide they want to do something else, have to care for a sick family member, want to work at home to raise kids, or, for whatever of life’s reasons, don’t hit 20 or 30 years in education. They, too, are disadvantaged by a retirement system structured in a way that lacks portability, equity, and basic standards to ensure that more Americans can benefit from it.

Most teachers lose out because their pension plans are so intensively backloaded. According to economist Marty Lueken, the median amount of time it takes for a teacher to earn a pension worth at least what they themselves contributed to it is 25 years—a quarter century. Almost all of a teacher’s pension wealth is created in her last few years on the job. The result is an arbitrary system that disadvantages people based on various events in their lives, as well as their gender, because women are more likely to take time out of the workforce.

Hardly anyone talks about the 80 percent of teachers who do not earn full pensions. Or about the more than half who never receive any pension at all.

On top of this, not all teachers have access to the basic Social Security disability and retirement benefits that most Americans take for granted. State workers were left out of the original Social Security Act in 1935, initially because of concerns over whether the federal government could tax state and local governments. Later, when states were given the opportunity to extend coverage to public-sector workers beginning in the 1950s, most states chose to extend coverage. A handful of states, however, chose not to. Instead, these states bet they could provide better coverage through state pension plans alone than through the combination of a pension and Social Security. So unlike our hypothetical Des Moines teacher, about 40 percent of public school teachers, including all teachers in major states like California, Illinois, and Ohio, are not enrolled in Social Security. Those teachers are particularly dependent on, and especially vulnerable to, poorly designed state pension plans. Today, a combination of union politics and higher-income states not wanting to send more money to Washington than they get back because of Social Security’s progressive structure creates a stalemate.

Collectively, this is not a marginal problem, it’s a substantial retirement security issue. As of 2016, there were 3.8 million public school teachers, making it one of the largest professions in the United States, and by far the largest profession made up of college-educated, middle-class workers. The sheer size of the teaching workforce should make the quality of their retirement benefits, not to mention the financial health and long-term sustainability of those plans, a national concern.

Unfortunately, the concern that too often grabs headlines is costs. States are collectively facing at least a $500 billion shortfall just for their teacher pension plans—and states face shortfalls of billions more in health-care liabilities. States have responded to this cost problem by reducing benefits for new and future teachers, making it harder to qualify for pensions at all, and by increasing employer and employee contribution rates. From the employer side, states and school districts are now contributing about twice what private employers pay in retirement costs, and retirement benefits alone amount to 10.5 percent of per pupil expenditures.

The unexciting but expensive truth is that states have to find a way to pay down their pension debt. These were obligations made to public servants that should be honored. In many states legal protections mean benefits for existing retirees or workers near retirement can’t be touched. And even where they can be it’s not the right thing to do to workers who made plans based on these retirement schemes. States should structure their pension debt as efficiently as possible, but they have to pay it. That’s not much of a bumper sticker, but it’s the reality state policymakers are facing.

For future and early-career teachers, however, states can make better choices that address both the retirement security side of teacher pensions and the costs. And this is a place progressives should be focusing their efforts. In the public debate the policy choice is often framed as one between traditional defined benefit teacher pension plans like the ones mostly in use today and employee-funded 401(k)-style plans like those most private sector professionals use. In practice this is a false choice, and there are a range of options as well as hybrid ideas like “cash balance” plans that are essentially portable and funded pensions.

It’s also a false choice because while advocates for traditional pensions are quick to attack 401(k)s, they fail to note some important advantages. In the private sector, for instance, federal law requires that employees become eligible for some employer contributions within three years, and full vesting of employer contributions by year six. With public-sector teacher pensions, in contrast, there are no federal safeguards, and 16 states require at least ten years to vest while the median vesting period is seven years. In an effort to save money, states are making it even harder to vest.

401(k) style plans are also portable. They increase a participant’s risk by tying retirement more closely to investment performance, but they lower life risk because your retirement wealth goes with you if you move, change careers, or stop working. And traditional pensions still carry market risk as well. One reason so many state plans are underfunded today is a reliance on wildly unrealistic assumptions about investment returns (something that would also be illegal under private-sector pensions). In the public-sector, low market returns are paid for through rising employer and employee contribution rates, which subsequently reduce take-home pay for workers.

Private sector retirement is hardly a model, either, but the issues are not nearly as stark as most advocates make them and there are lessons from a variety of retirement plans the education sector can learn from. And not surprisingly there is no single solution, only a lot of tradeoffs. But there are some guiding principles for policymakers that apply in all states:

1. Tackle the Right Problems

The debate over public sector pensions is too often framed in terms of outrage at the pension plans’ “generosity.” Newspapers find and report on retired public sector workers who “spiked” their pension benefits by (legally) cashing out vacation and sick days to make their final salaries look higher than they were. The public thinks issues like these are the biggest problems with current pension plans, so these are the problems legislators tackle. While it’s important to address the various perverse incentives that exist today, they are a relatively small part of the problem, and none of these fixes does anything to change the structure of pension plans and ensure that they meet the needs of workers. The problem is fundamentally a system that is far too backloaded for today’s workforce and too expensive. Any retirement system that only works for one in five participants must be rethought. It takes teachers too long to earn a decent pension, and taxpayers are paying for an inefficient system.

2. Clean Up the Financial Mess and Address Human Capital Problems

By focusing only on the financial aspects of plans, policymakers neglect the main purpose of retirement plans in the first place: to offer an attractive and secure retirement to employees. While the national debate about pension reform tends to focus on funding and sustainability issues, it’s possible to have a fiscally sound pension plan that nonetheless doesn’t meet the needs of the vast majority of workers or works at cross-purposes with efforts to improve the quality of the teaching force. State leaders must resist the temptation to fix only the most pressing financial problems, which risks making their state less attractive to current or future teachers.

States shouldn’t expect to dig out of this problem overnight. Nor should they ask new teachers to bear the burden of past mistakes. Instead, states should think long-term about how to get new employees enrolled in more fiscally sustainable and portable retirement plans. At a minimum, states should ensure portability so teachers can take with them their own contributions, a fair share of the interest those contributions accrued, and a share of the employer contributions that were made on their behalf.

3. Join Social Security

While Social Security faces its own set of unique problems, enrolling all employees in Social Security is another way states and districts could provide benefits to a mobile workforce. Because it’s a national retirement security program, Social Security is the very definition of portable. From the employer’s perspective, Social Security also eases the burden on state or district pension plans. Participating employers are able to offer complementary, less-expensive plans, which helps lower unfunded liabilities and reduce funding uncertainty. Social Security isn’t a substitute for effective teacher retirement plans, but is part of the solution. All teachers should be enrolled in Social Security.

4. Be Creative

A debate juxtaposing traditional defined benefit pensions versus 401(k)-style plans is a false one. The federal government, for instance, has phased out its reliance on DB plans in favor of hybrid retirement benefits that combine a less generous defined benefit plan, enrollment in Social Security, and a defined contribution plan. This model offers the best of all worlds, providing employees with the security of pension plans and Social Security with the portability of DC plans. Some states have adopted similar hybrid models.

Another alternative retirement structure, called a cash balance (CB) plan, combines many of the best elements of both types of plans. Each year, a CB plan awards employees with a salary credit (some percentage of their salary) and, on the balance already accumulated, an investment return credit (some fixed or indexed rate of return). Employers guarantee a fixed-rate investment return usually set at some relatively safe percentage or indexed to an external figure like long term Treasury bonds. Workers own their accounts and can take the entire balance with them when they are ready to leave or retire. More than 11.5 million workers in the private sector participate in a cash balance plan, and state legislatures in Kansas, Kentucky, and Nebraska have all adopted cash balance plans for their state employees.

In other words, policymakers shouldn’t get trapped in the political traditional-pension-versus-401k debate. There are viable alternate options that can meet the multiple goals of improving sustainability, helping teachers save for retirement, and better aligning retirement policies with today’s education labor market. Most important, although policymakers face hard choices, change from traditional defined benefit plans need not be unworkable or unfavorable to teachers.
What policymakers should not do, however, is perpetuate a system that creates a small number of winners at the expense of a large number of losers and costs a fortune along the way. Retirement security is a serious challenge for most Americans, and policymakers shouldn’t make it even harder on people who choose to teach in America’s public schools.

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Andrew Rotherham is a co-founder and partner at Bellwether Education, a nonprofit working with education organizations.

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Chad Aldeman is an associate partner at Bellwether Education and editor of

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