What Teachers Lose to Pension Debt

States have fallen behind in their obligations, spending more on retirement debt and less on educators’ pay.

Are teachers losing out on thousands of dollars in potential extra pay because states are behind on maintaining pensions?

In a new study released by TeacherPensions.org, Chad Aldeman relied on federal data to compare the wages and benefits of public-school teachers to those of other workers. He found that states and districts on average put 12 percent of teacher salaries toward the pension programs millions of school employees rely on for their retirement. That means more than $6,800 public dollars per teacher go toward supporting the pension funds states and districts promised to maintain.

In addition to that 12 percent, states and districts contribute on average 5 percent of teacher pay toward the pension benefits they’ll actually see come retirement—a rate that’s considered above average in the private sector. Without the $6,800 in “pension debt,” Aldeman contends public-school systems could spend that money on teacher salaries or other instructional material to improve student outcomes.

“I don't think teachers fully recognize how much the retirement system is costing to essentially keep it afloat,” Aldeman said in an interview.

Pensions are complicated financial instruments that have a lot of moving parts, but broadly they are promises an employer makes to employees for how much money will be available as soon as they retire. That’s virtually the opposite of the more popular retirement instruments today—the 401(k) and similar tools—that place the onus on individuals to invest in a way that will yield the retirement money they think they’ll need. Sure, many employers help out with matching contributions to a worker’s retirement fund, but there’s no certainty the stock market will stay on pace to net the worker the desired nest egg. Pension managers, on the other hand, have to “figure out how much they'll need to contribute today in order to have money to pay those benefits in the future,” explained Aldeman. “And it requires a lot more assumptions about how fast the money is going to grow, what the benefits will actually be worth, how long teachers will live in retirement, how much salary they'll make in the future.”

Lately, teacher pension managers across the country have forecasted poorly. States are short nearly $500 billion in what they promised teachers. For every dollar governments pay toward teacher pension plans, only 30 cents go toward actual benefits for today's workers, the report notes. The remaining 70 cents must be used to pay for the pension promises that weren't paid for in prior years.

How to characterize state’s outstanding pension obligations is a matter of debate. Aldeman calls it debt. Others don’t like the term. “​​The unfunded liability is not debt,” said Teresa Ghilarducci, a professor on retirement security at The New School, in an email. Rather, the investments made for the pension fund have not yielded the amount needed to pay the retirement money to everyone, she said, pinning the blame on pension managers and state lawmakers for investing poorly or not putting enough money into the fund to keep it afloat.

For Aldeman and other pension skeptics, the high price to maintain these retirement promises wouldn’t be as much a problem if all teachers benefited from the pension programs. But as I’ve reported for The Atlantic, most state pension programs are backloaded to reward teachers who remain as educators in their states for 25 or more years. Only one-fifth of all teachers will receive the full amount for which they’re eligible, while each year thousands of retiring public-school educators won’t see a dime of that money. Forty percent of teachers aren’t eligible for Social Security either.

For many teachers, surrendering higher pay in the private sector for the opportunity to acquire ostensibly better benefits may not bear the desired outcomes, TeacherPensions has argued before. “We don't recommend that states go after the pensions of existing retirees or people in the workforce now,” Aldeman said. "That doesn't mean we can’t design a better system going forward for new workers. It's not about dismantling; it's preserving promises you’ve already made while moving to something better."

That “something better” is a bit nebulous. The report cites examples of using some version of 401(k) or programs similar to pensions called cash-balance plans that have low rates of return but are pretty safe—meaning a bad year in stocks won’t eviscerate decades of steady gains in one’s retirement account. Aldeman also spoke favorably of the federal government’s transition in the 1980s from a full pension for workers to a mix of pension, a 401(k)-type program for workers that was in part matched by the government, and Social Security.

Today, unions are typically critical of plans to shift away from pensions. A proposal in California to transition to 401(k)-type plans for public employees was defeated resoundingly this year, The Sacramento Bee reported.

Other organizations that are protective of pensions take issue with the premise that the retirement benefit is supposed to be evenly beneficial to all teachers. “What is the obligation to someone who comes to teach school for two or three years and then leaves?” asked Keith Brainard, the research director for the National Association of State Retirement Administrators, in a phone interview. He said that many school districts “have decided that it's better to push more of the retirement benefit to teachers who are going to stay longer who provide a sense of longevity and loyalty to the profession and to the school district rather than to reward those who just leave after a few years."

Beyond the philosophical underpinnings of who deserves a pension and why, plans like the 401(k) generate slightly worse returns than pensions, according to a study by the Center for Retirement Research at Boston College. Between 1990 and 2012, pensions outperformed such plans like 401(k)s by 0.7 percent annually. The 2015 study suggested the fees associated with managing 401(k)s contributed to the disparity.

“Switching to a 401(k) ​never help​s to get out of the pension math,” said Ghilarducci. “401(k)s are more expensive and less efficient, so you are either going to increase costs or substantially reduce teacher benefits. And research shows that, by and large, you get the quality of teachers you are willing to pay for.”

There are other disadvantages to teacher pension plans. Unlike Social Security benefits, they don’t always travel with the employee from job to job; teachers who accept jobs in a different state may have to deal with a whole new set of retirement rules and conditions. They can also lose out on the interest gains their pension plans have accumulated.

More than 3 million teachers educate the nation’s public-school students. They’re relatively accomplished academically: While roughly 40 percent of Americans have attained a bachelor’s or associate’s degree, virtually all teachers have a bachelor’s, and many have master’s—meaning they can be choosers in the labor force. Whether pensions are the better bet for public-school educators is unclear, but keeping them happy so that they continue their vital role of inspiring and guiding nearly 50 million students is essential—and so is figuring out a benefits scheme that works for them.

Or as Ghilarducci put it, “​Schools are expensive, good teachers are expensive, but pitting students against the teachers has never been a path to well-run school districts that advance learning.”