It’s long been known that teachers are underpaid, but now it looks like they’re getting the shaft from their pensions plans as well.
A new report out this week found that state governments have cut the value of pension benefits offered to new K-12 teachers by 13% from a high point in 2005, which is equivalent to a $100,000 reduction in the lifetime value of pensions on average for teachers hired today versus teachers hired before the Great Recession.
The report from Equable Institute assessing the landscape of public retirement benefits offered to public school employees in the U.S. finds that the value of teacher pension benefits is at its lowest point in modern history (using data going back to 1965). The Retirement Security Report: Teacher Edition evaluates all 316 public state and local retirement benefit tiers that currently have enrolled teachers and non-instructional employees to assess the state of teacher benefits.
“There is a historic idea that if you can get a job with a pension plan that you’ll have a good retirement, and for some people who became teachers two or three decades ago that was true. But we’ve found that the value of pension plans for new educators is falling,” said Anthony Randazzo, executive director at Equable. “This doesn’t mean that states should abandon pension plans, but it does mean all stakeholders should look closer at whether pension plans being offered to new individuals joining the teaching workforce are actually being enrolled in an adequate retirement plan.”
Using Equable’s Retirement Benefit Score methodology, the report reveals that a majority of educators are not provided a path to retirement income security, when measured against the benchmark of achieving 70% replacement of pre-retirement income at least by age 67. Specifically, the analysis shows:
• Since the Great Recession, 45 state retirement systems have introduced a new tier or class of benefits, that have generally reduced the value of pension benefits offered to new members. Teachers who started in the classroom in 2005 can expect that the average lifetime value of their pension will be approximately $768,000 when they reach normal retirement age. However, teachers hired during the 2022-23 school year will only be eligible to earn a pension worth just $668,000 by the time they put in the same years of service.
• When averaging across all entry ages and career tenures, there are only 10 retirement plans that serve all workers well. Four are traditional pension plans, four are hybrid plans, and two are defined contribution plans.
• Short-term teachers (less than 10 years of service) and medium-term teachers (10-20 years of service) are not served well by their retirement plans on their own regardless of plan type. This includes pension, defined contribution, hybrid, and guaranteed return plans. Leaving aside legacy retirement plans, only 12 out of the 264 plans currently available to new teachers serve medium-term teachers well and just two of 264 plans serve short-term teachers well.
• Full-career teachers (those who reach normal retirement age) are typically served well by their retirement plans no matter what the plan design type, with 82.3% of plans open to new hires projected to provide adequate retirement income security. However, full-career teachers only account for one-third of the teacher workforce.
• Pension plans have declined in quality. Of the 316 plans in Equable’s database, the top performing pension plans are legacy plans which are unavailable to new teachers.
DC plan in South Carolina ranks best
The five best states for new teachers to enroll in a retirement plan are South Carolina, Tennessee, South Dakota, Oregon, and Michigan. Three of these states offer a hybrid plan (TN, SD, OR), while the other two offer a choice between a pension plan or a DC plan (SC, MI).
The report finds the highest quality retirement plan in the U.S. for new teachers is a DC plan in South Carolina.
Most teachers who spend their full career in the same state are served well by their retirement plan, and this very true for the South Carolina Optional Retirement Plan. And the teachers who spend 10 years or less in the classroom and medium-term teachers who put in 10 to 20 years are also served well by this South Carolina retirement plan.
The report notes it is uncommon to have all worker types served well by the same retirement plan, and the primary reason is that the South Carolina Optional Retirement Plan has sufficient contributions rates (14% average) and immediate vesting in employer contributions. Teachers in South Carolina also have the choice of a pension plan if they want.
The other plan the report says serves all teachers well is Tennessee Consolidated Retirement System’s “Hybrid Plan.” Tennessee’s plan does well because the 7% contributions into the DC portion of the plan, combined with a 5% crediting interest rate on members’ contributions to the pension allow it to perform especially well for short-term and medium-term teachers.
In a bit of a distant third is a relatively new hybrid plan in South Dakota, followed by a hybrid plan in Oregon and DC plan in Michigan.
The bottom five states in terms of the quality of retirement benefits offered to new teachers are Georgia, Wisconsin, Kentucky, Texas and Louisiana.
To dive deeper into the findings of the Retirement Security Report: Teacher Edition, visit Equable.org/RSRTeacherEdition.
SEE ALSO:
• 403b Participation Undeterred by Pandemic
• Transition from Pensions to 401ks Glaring in New Government Graphic
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
No one who has worked in finance thinks a 6 figure salary out of the gate, a 80% pension, Cadillac health care throughout retirement, job security and summers off to babysit a few hours a day is ‘underpaid.’