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The Burden of Teachers' Pensions

While many would agree that the public school systems are in need of a serious overhaul, there is considerable disagreement over how to achieve it. One factor that has consistently been promoted as deserving attention is teacher compensation. Many argue that teachers' salaries are too low, and if increased would incentivize current teachers to work harder as well as attract more quality people into the profession.

The claim that teachers get paid too little is by itself contentious. Even so, our nation's public school teachers are outfitted with quite generous pension plans, which significantly increase the value of their overall compensation. Most are set up with defined-benefit contribution plans, which generally take into account both the number of years the teacher has been employed and his salary over the years, and which promise him a specific amount of money regardless of whether the fund is able to pay it or not.

Unfortunately, many states are now facing, in some cases such as California and Virginia severe, shortfalls in teacher pension plans funding. Proposals of how to reform the system include moving toward defined-contribution plans, which entail a certain percentage of the salary to be set aside for retirement each year by the employer and the employee. These plans--a 401k is one example--are the norm in the private sector, but teachers unions eschew them arguing they are less secure. Crucially though, reform ideas will be significantly hampered by the fact that many states have enacted constitutional provisions to protect public pensions in such a way as to prevent any changes resulting in a benefit reduction for public school teacher retirees.

This section looks at the current state of public school teacher pensions, and the arguments of key players on both sides--those who support the current or an even more generous pension system, and those in favor of reform. The interests of legislators, teachers and their unions clearly dominate the debate, but the burden of teachers pensions will ultimately rest on taxpayers.

For information specific to teacher compensation, take a look at Teacher Pay, Rewards & Tenure.
For more broad information on public employee unions, take a look at Public Pensions Crisis.

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Myers reports on state laws affecting the pensions of Chicago Public School teachers. He discusses the politics behind unions involved in the decision making process and their important role in determining a balanced budget. According to Myers, the Caucus of Rank and File Educators (CORE) is a recent contender "whose members say the Pension Board needs better...

In this article, Hinz discusses the differences between state pension plans and those in the public-sector, specifically within the City of Chicago. He writes that it is time to change the pattern of state defined-benefit pensions. According to Hinz, one of the strongest opponents of a this sort of change would be the unions; however, he argues that the pensions...

A recent proposal in the Michigan community would require all charter school teachers to be enrolled in the state's retirement program. According to Shane, this change would eliminate third party employers' choice to offer retirement options from sources other than the state. While this is currently the case for public school teachers, it is a move that could be...

Biggs reports on a loophole within a Social Security law that has been allowing Texas teachers to collect "tens of thousands of dollars in extra retirement benefits for just a single day's work." With the current system, teachers can evade the government pension offset simply by working their last day in a job that is covered by Social Security, essentially any job...

"After losing $4.4 billion on investments in fiscal year 2009, and 5 percent on investments in fiscal 2008, the teachers’ pension is now underfunded by $44.5 billion, or 60.9 percent, according to the Commission on Government Forecasting and Accountability’s March 2010 report. By comparison, only 20.3 percent of the Chicago Teachers’ Pension Fund is unfunded."

"The Teachers' Retirement Board, the governing body of CalSTRS, today adopted the actuarial valuation of the Defined Benefit Program as of June 30, 2011. The valuation reflects a two-percent decrease in the funding status from the previous year, as the final impact of the extraordinary losses in 2008-09 is recognized.

The latest valuation shows a funding status sufficient to cover 69...

"Employees of state and local government in Pennsylvania earn less than their counterparts in the private sector, the Keystone Research Center reported, citing findings from a new study.

State employees earn an average of 4.5% less in wages than comparable private sector employees, while local employees earn an average of 12.9% less, according to the study by the Center for State and...

The recent recession has sparked debate on benefits provided to teachers reaching retirement. Biddle provides a basic overview of recent legislative proposals and their implications and costs for taxpayers, teachers, unions, and school districts.

Roff comments on a study recently released by the Foundation for Educational Choice and the Manhattan Institute that found the underfunding of teacher pension plans to be an "emerging crisis" in all 50 states. The study found that all pension plans faced shortcomings and discrepancies between what the state was reporting and the actual value of liabilities of...

Costrell and Podgursky comment on the debate over teacher pensions and the traditional "defined benefit" plan in the public sector and the "defined contribution" plan typically received by most professionals in the private sector. The authors explain the differences between the two plans and introduce another alternative, the "cash balance" plan, as a way for...

Barro comments on a report released by the Manhattan Institute that "scrutinizes the financial statements of the 59 pension plans covering most teachers in the United States" for the large gap in assets needed to cover what has been promised to retirees. According to Barro, public pensions do not take the same risk factors into account that private sector pension...

"The ongoing global financial crisis is forcing many employers, from General Motors to local general stores, to take a hard look at the costs of the compensation packages they offer employees. For public school systems, this will entail a consideration of fringe benefit costs, which in recent years have become an increasingly important component of teacher compensation. During the 2005–06...

Mekeel reports on James P. Testerman, president of the Pennsylvania State Education Association, who opposes "changing the pension plan to a defined contribution plan - such as a 401(k) - for new employees." According to Testerman, such a plan would put teachers' pensions "at risk when the market drops with 401(k) plans, while taxpayers would be at risk with...

Barro reports on pension and retirement plans across the country that have been losing values. According to Barro, these plans are underfunded by $332 billion, with a real funding gap of "nearly a trillion dollars" for which "you and I will bear the burden of covering their shortfall." In this article, Barro explains how this gap came to be and discusses some...

"MICHIGAN needs to improve how it manages the long-term bills coming due for both its pensions and retiree health care and other benefits. Starting in 2002, the state consistently failed to meet annual actuarially required contributions, dipping below 70 percent in 2004. However, the state contributed 111 percent of the annual required contribution in 2008, and had set aside 84 percent of the...

Chart or Graph

"The State of California understates teachers’ pension unfunded liabilities by as much as $101.2 billion. to put this in perspective, California’s total budget was about $89.5 billion for FY2009-2010."

"The State of California understates public employees’ pension unfunded liabilities by as much as $149.9 billion, which is...

This chart shows the defined-benefit pensions plans in the public, private, and private non-union sectors. As of March 2009, the majority (84 percent) of state and local government employees had the option to participate in defined-benefit pension plan. However, only 21 percent of those working in the private industry and 16 percent of those working without unions...

With data collected from the U.S. Department of Labor, this chart gives the cost of retirement comparing employer contributions for public school teachers (K-12) to those for private-sector professionals. The data shows that between March 2004 and September 2008, the difference rose from 1.9 to 4.2 percent, with contributions to retirement benefits being...

This graph shows that "teachers who leave early, or move elsewhere, fare poorly in pension benefits compared to those who stay." While the graph is using data from Missouri, Costrell and Podgursky, note that this is a similar case across most states.

This graph shows the relationship between assets and liabilities of Michigan pensions from 1999 through 2008. Since 2001, the liabilities have exceeded the assets, reaching $70.35 billion in 2008. Additionally the graph shows that in 1999 101.06% of the pensions were funded, while in 2008 that number was only 83.63%.

This chart shows the pensions for a teacher with 30 years of experience teaching and a final average salary of $60,000. The left (solid) bar are state pensions only, while the right (striped) bars also include Social Security benefits.

"Table 2 ... lists the top 25 districts in terms of their AAL (the highlighted column). The AAL represents the present value of projected future benefits earned by employees to date. To put the AAL in perspective, the column to the right of the highlighted column provides the AAL as a percent of the total operating revenues."

Analysis Report White Paper

"These programs will cost Illinois more than $100 billion during the next 30 years. Because the state has not designated money for these three programs, they operate on a yearly pay as you go basis. This means that as retiree health care costs rise faster than the state’s total revenues, they will squeeze out state spending on other core services."

Abstract

"Defined Benefit pension plans often generate odd time patterns of benefits. One typical pattern exhibits low accrual in early years, accelerating in mid-late years, followed by dramatic decline, or even negative returns in years that are relatively young for retirement. We consider four states for specific analysis: Arkansas, Missouri, California and...

"Teacher pensions consume a substantial portion of school budgets. If relatively generous pensions help attract effective teachers, the expense might be justified. But new evidence suggests that current pension systems, by concentrating benefits on teachers who spend their entire careers in a single state and penalizing mobile teachers, may exacerbate the challenge...

"In response to a journalist inquiry regarding research on funding of Ohio's teacher retirement system and its effect on school district finances, this analysis by the Thomas B. Fordham Institute points to serious questions and profound concerns about the health of Ohio's teacher pension system, and that similar time bombs may be ticking in other states, although...

From the Executive Summary:

"This paper compares Maryland’s former (prior to Spring, 2006) teacher pension system to those in Pennsylvania and several other states. On the basis of simple replacement rates, the former Maryland state plan was the lowest in the nation. However, such a simple comparison ignores other...

In this study, Bender and Heywood compare employees of state and local governments to equal counterparts in the private sector. The report found that  state employees earn, on average, 4.5% less and local employees 12.9% less in wages than those employed in the private sector. However, despite earning less, health care, retirement and other benefits compose a...

Abstract

"This paper examines late career mobility and retirement decisions for a cohort of mid-career Missouri public school teachers. Specifically, the paper follows a cohort of teachers whose combined age and experience totaled 45 or more years in fall 1991 through the 2005-06 school year. Like many public employee...

From the Abstract:

"This background paper aims to foster understanding and informed discussion of public education pensions. It describes the current system; examines concerns about funding, sustainability, equity, and effectiveness; and discusses pension plan structures and some options for pension plan redesign. ... This...

"California has promised its public employees lavish pensions and retiree health benefits without setting aside nearly enough money to pay for those benefits. As a result, California already admits to a $75.5 billion shortfall in paying for these promises to public employees—$40.5 billion for the teachers’ retirement plan (California State Teachers’ Retirement...

"Teacher pension funding gaps are three times greater than what states report, states a new Manhattan Institute/Foundation for Educational Choice study. Authors Josh Barro and Stuart Buck reveal the major disparity between what states report and the true value of unfunded liabilities for teacher pensions. These liabilities for all 50 states now total almost $1...

Video/Podcast/Media

In a brief audio clip featuring Union president Marilyn Stewart, she discusses and critiques a pension reform bill that will require Chicago teachers to work until they are 67 to receive their pension.

"The interactive map is based on Table 2. Market valued funding ratios and unfunded liabilities on page 42 of An Options Pricing Method for Calculating the Market Price of Public Sector...

"Robert Costrell and Michael Podgursky talk with Education Next about ways to eliminate the peculiar incentives built into current teacher pension systems."

"The Minnesota Taxpayers Association recently completed a study of Minnesota's largest public pension funds and found that many are drastically under-funded to the tune of billions of dollars.

The worst case scenario is the Minneapolis Teacher's Fund - facing bankruptcy in a few years without a bailout from taxpayers."

"Robert Costrell talks with Education Next about the ways that teacher pension plans punish short-term and mobile teachers and reward teachers who spend their entire career teaching in one state."

Vermont teachers and union members meet to discuss alternative measures to a plan being offered by the retirment comission. The changes would change the retirement system in an effort to save the state money during a budget crisis.

Primary Document

Brainard gives testimony before the U.S. House Committee on Education and the Workforce Subcommittee on Employer-Employee Relations during a field hearing on "Examining the Retirement Security of State and Local Government Employees." During his testimony he speaks about the defined benefit pension plans that many teachers are a part of, but are are "risky or...

This bill, introduced by Delegate Manno to the House Apprpopriations and Ways and Means Committee, would establish the Teacher Pension Sustainability and Solvency Trust Fund. This fund would be administered by the Secretary of Budget and Management and be used to transfer money from the General Fund of the State to "offset certain contributions to certain systems...

This bill, also known as the "55/25 legislation," was introduced by senators Savino and Oppenheimer as an early retirement incentive for New York teachers belonging to either the New York State Employee Retirement System (ERS) or the New York State Teachers Retirement System (TRS). The bill allows members of ERS or TRS, who are at least 55 years of age, and have...

"The purpose of this report is to provide updated information on actuarial accrued liabilities as they relate to Other Postemployment Benefits (OPEB) for school districts in Minnesota."

Executive Summary

"This report presents the results of the statistical analysis of actual experience from July 1, 2003 through June 30, 2006 among active, inactive and retired employees and their spouses and beneficiaries covered by the Teachers' Pension and Annuity Fund of New Jersey (TPAF). This study is intended to comply with...

"In the chapters constituting Part I of the volume now published a description of the evolution of teachers' pensions and an analysis of the general problem of providing retirement allowances to teachers is given, together with a discussion of the principles governing the establishment and maintenance of sound systems. In Part II an account is given of the movement...

Debra Bradley, Director of Government Relations for the New Jersey Principals and Supervisors Associations testifies on the issue of "secure and adequate public employee pensions." She is speaking out against proposed legislation and urging the process to be slowed down and allow for it to be thoroughly reviewed. The bill has many changes that would affect the...

Representative Tom Reynolds testifies on House Bill 5106, An Act Concerning a Commission on State Employee Pension and Post Employment Benefit Liabilities. He supports the bill that was proposed as part of a budget reform package that would change New York policies and practices and alter the underfunded liabilities of pensions for state employees. According to...

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