Reopening Our Schools

At the heart of any attempt to elevate the teaching profession lies the issue of compensation.

Teachers have a right to be upset. For decades now, average teacher salaries have barely kept up with inflation.

The first place to look is the total amount of education spending. But while there is certainly a need for higher spending in some states, overall education budgets have gone up. On a real, per-pupil basis, education spending nationwide is up over the last 5, 10 and 20 years’ time.

So what explains this disconnect? How is education spending rising while teacher salaries are flat?

Part of the answer goes to how many people are being asked to split the pie. Compared to the number of students in our public schools, there are now comparatively more teachers and, especially, more administrators on school district payrolls. Classroom teachers may not feel it through smaller class sizes, but there are more adults working in schools than ever before. That means more people who need to be paid.

But another factor eating away at education spending has been the rapidly rising cost of employee benefits. This trend has played out in all sectors of the American economy, particularly in relation to the seemingly ever-rising cost of health care. But public school teachers are unique, especially when it comes to retirement plans.

About 90% of public school teachers are enrolled in defined benefit pension plans. These plans offer a number of positive features. Under pension plans, teachers don’t have to worry about how much to save or where to invest. When they’re ready to retire, they’re guaranteed monthly payments for the rest of their lives.

But these plans have downsides too. Due to the way the benefit formulas work, teachers in most states have to stay for 20 or 30 years in order to qualify for decent retirement benefits. Everyone who leaves before then can withdraw their own contributions, but that won’t be sufficient to secure a comfortable retirement.

Teacher pension plans also have financial problems. Namely, they have accumulated more than $500 billion in debt. These debts come in the form of unfunded liabilities — liabilities that are owed to current and future retirees. The debts must be paid, and in response, states are cutting back on other education spending, raising employer and employee contribution rates and cutting benefits for the newest generation of teachers.

Financially speaking, school districts are now spending about $50 billion each year on teacher pension costs, and the majority of that money is going toward debt, not for worker benefits. To put it in context, for every $1,000 the average school district pays to a teacher, they must send $170 to the state pension plan. Of that $170, only $50 will go toward benefits, and the remaining $120 goes toward debt.

While teachers may not see these costs directly, they are affected. As spending on pensions rises, that limits how much districts can afford to pay their teachers in base salaries. Absent their pension debts, districts could afford to raise teacher salaries by an average of $4,300 per teacher.

These pension debts exacerbate other problems. For one, because they are levied statewide, they amplify funding inequities. Low-income areas that can’t afford to pay their teachers well have to pay the same rates, even as higher-income areas with more veteran teachers receive better benefits on the back end.

Unfortunately, there is no quick fix. The debts must be paid to current and future retirees, but states could adopt different types of retirement plans for new hires that would improve benefits and prevent states from accumulating more debt in the future.

The choices are not simply black-and-white between a traditional pension plan and the 401(k) plans that are more common in the private sector. As an example, more than 400,000 Texas county and municipal employees, including nurses, mechanics, sheriffs and judges, are enrolled in a different type of defined benefit plan. Under this structure, workers receive a fixed rate of return, and when they’re ready to retire, they can choose among a range of options for guaranteed monthly payments, just like in a traditional pension.

Another option would be to give teachers a say over their retirement. In nearly every state, employees at public colleges and universities have a choice between a traditional pension or a 401(k)-style plan. These public sector 401(k) plans look very different than what’s typically offered in the private sector — the plans offered to higher ed faculty plans are much more generous. There’s no reason states couldn’t give K-12 teachers the same options.

It’s natural to worry that changing retirement plans might harm our ability to recruit and retain high-quality teachers. However, the empirical research suggests that teachers are more likely to base their employment decisions on factors like base pay, family or other working conditions. So rather than thinking of retirement plans as one more tool for employers to shape their workforce, we should instead focus our efforts on providing all teachers with higher salaries paired with secure, sustainable retirement benefits.

Last year, thousands of teachers in Kentucky went on strike to protest a surprise pension bill passed by the state legislature without public review. The bill would have closed the existing defined benefit pension, which provides teachers with guaranteed monthly retirement income based on length of service. It would have placed new teachers in a “cash balance” plan, a 401(k)-style plan with a minimum interest guarantee, with significantly lower benefits. The bill was voided by the courts, but Kentucky teachers face ongoing challenges to their pension.

As teachers across the country mobilize for education funding and fair pay, pensions are high on their list of priorities. What they know from experience, and research confirms, is that pensions are a win-win for teachers and schools, delivering superior retirement security and retaining teachers for decades. Conversely, abandoning pensions in favor of 401(k) or cash balance plans would come at great cost to teacher livelihoods and erode education quality.

The UC Berkeley Center for Labor Research and Education analyzed whether the teaching profession as a whole is better off with their existing pensions or with alternative plans. We first focused on California, then partnered with the National Institute on Retirement Study on a six-state study covering Connecticut, Colorado, Georgia, Kentucky, Missouri and Texas.

Based on empirical turnover and demographic data, we predicted the number of teachers who will end up in each of 1,500 career scenarios, defined by age and years of service at separation. We then calculated each teacher’s retirement income from their current pension plan and from alternative plans. The findings are weighted by teaching position, i.e., representative of the teacher workforce in each state.

Our analysis clearly shows that a majority of teachers currently covered by statewide public pensions will serve out a long career in the same state and are far better off with their existing pension than an alternative plan. In California, the average teacher will work in public education in the state for 29 years and leave service at age 60. In the six-state study, the average teacher will work 25 years in the same state and leave at age 58. Across the seven states, 75% of active teachers will be eligible for retirement by the time they separate from service.

A key reason that teachers in these states stay to build a long-term career is that pensions are highly effective retention tools. As Exhibit 1 shows, turnover rates among teachers covered by pensions plummet a few years after hire, stay low through mid-career, then spike in late career. Teacher decisions about when to leave are closely linked to the retirement age rules of each state’s pension.

Ultimately, 80% of teachers in the seven states combined will receive higher, more secure income from their pension than they could receive from an idealized 401(k)-style plan (Exhibit 2). This assumes the same contribution rate as the pension, low fees and no investment mistakes. Multiple benefit studies show that pensions deliver greater “bang for the buck” when it comes to generating maximum retirement income for each dollar invested, thanks to risk pooling, a longer investment horizon and professional money management. In the seven states we studied, typical teachers will receive 20-116% higher retirement income through their pension than they could with a 401(k).

What about cash balance plans, which accrue lump-sum benefits like 401(k)s but guarantee a minimum return on contributions? For California, we also compared the pension to an unusually generous hypothetical cash balance plan that guarantees 7% annual interest — same as the long-term investment return expected by the statewide teacher pension fund. A large majority of California teachers, 76%, are better off with their pension than this generous cash balance plan.

One legitimate concern about traditional pensions is that teachers who leave in early or mid-career might be short-changed, depending on the benefit policy. However, many recent studies, including several authored by Chad Aldeman of Bellwether Education Partners, have a different perspective on the magnitude of this problem suggesting “most teachers” will not earn a decent pension. This conclusion, based on new hire attrition, ignores the vast majority of teachers working in public schools today. Based on our representative analysis, less than 20% of teachers in states with pensions will leave with benefits that might be considered inadequate. The rational solution is to enhance their pension benefits, as Colorado has done at minimal cost, not to replace them with plans that make most teachers considerably worse off.

Finally, policymakers should beware that closing a pension can exacerbate any existing funding problems and increase costs, by worsening cash flow and lowering investment returns, as a recent study from the National Institute on Retirement Security suggests. Several states, including West Virginia and Michigan, have learned that switching plans is no substitute for responsible funding policy. Most states have wisely chosen to adjust benefit levels and increase employee cost-sharing instead.

The evidence is clear: Teachers and schools are far better off with pensions. Switching to a 401(k), or even a cash balance plan, will invite instability in the classroom and undercut the modest retirement security of teachers.