Teacher Pension Plans: The $390 Billion Problem
The National Council on Teacher Quality contends in a new report that teacher pensions represent about $390 billion* in unfunded liabilities for states, and that a massive overhaul of the public benefits system is required.
While Congress debates sequestration and the fiscal cliff, NCTQ warns that there’s a sizeable financial hit looming ahead for states, as well.
“The thing we can’t underscore enough is that the pension crisis is real,” said Sandi Jacobs, vice president of NCTQ, in a call with reporters Wednesday.
NCTQ is a national advocacy and research organization that has recently drawn heat for its calls for better evaluation models to measure teacher performance, and for its plans to produce rankings for teacher colleges. NCTQ’s new pension recommendations include: shoring up pension funds to meet existing commitments; basing retirement eligibility on age, rather than years of service; and lowering the number of years teachers must work before they can vest in their pension plans.
The organization’s report didn’t sit well with the National Education Association, the nation’s largest teachers union.
Traditional pension systems are a better deal for both taxpayers and educators, says Dennis Van Roekel, NEA’s president. Pension plans are less risky than 401(k) plans, and when given the option teachers “overwhelmingly” choose the more traditional route to retirement savings, Van Roekel said. He pointed to West Virginia, which recently switched back to a traditional pension plan in order to save money.
“Educators contribute to their pension plans with every paycheck — and they never miss a payment. But some politicians haven’t held up their side of the deal and refuse to pay their contributions,” Van Roekel said. “Rather than debate whether or not to take a proven, valuable benefit away from our nation’s educators, let’s focus on what really matters – ensuring that all Americans have a secure retirement that allows them to grow old with dignity.”
NCTQ argues that many states structure their pension funds in ways that are actually unfair to teachers. In the past four years, 27 states have upped the amount teachers are required to contribute to their pensions. And 15 states make teachers wait 10 years to vest in their pension plans, up from nine states in 2009.
At the same time, state pension systems are being premised on what Jacobs called “unrealistic assumptions and projections” on the return on investment. The assumed rate of return for teacher pension funds typically runs 7 to 8 percent, according to NCTQ. California’s fund earned less than two percent last year, and Maryland’s rate was even lower, Jacobs said.
Given that the nation is slowly rebounding from the recession, “people might say the economy is going to get better and there’s reason to be optimistic,” Jacobs said. However, economists are not predicting significantly higher rates of return to happen for a number of years. The longer states premise the pension funds on the higher rates of return, “the more we allow these systems to get out of balance,” Jacobs said.
Only the District of Columbia and nine states — Alaska, Delaware, Idaho, New York, North Carolina, South Dakota, Tennessee, Washington and Wisconsin — were identified by NCTQ as having well-funded teacher pension systems.
Another significant concern: early retirements. All but 12 states base retirement eligibility on years of service, rather than age. In Kentucky, teachers can retire with full benefits after 27 years. If a teacher starts at 22 and retires at 49, NCTQ estimates it will cost the state nearly $800,000 in additional benefits by the time that individual reaches a more traditional retirement age of 65. States are beginning to “wake up” that early retirements are too costly, and are making adjustments, Jacobs said.
Because of pension changes in Ohio, 41-year-old teacher Tracy Radich will have work an additional eight years to earn full retirement benefits, the Wall St. Journal’s Stephanie Banchero reported.
“I worry I will get worn down and not have the energies that I have now to do all I need to do for my students,” Radich said.
*This post has been updated to reflect a change in the amount of the unfunded liabilities for states, after the NCTQ reported an error in its report and revised its calculations.