Teachers’ Pensions are Unaffordable for Teachers, Too

A traditional conservative critique of public sector pensions usually includes some mention about how government workers, particularly teachers, are all bankrupting the system with their generous benefits. There are a few reasons why this is an overly simplistic narrative, including a new analysis from USC Santa Barbara’s Dick Startz in a two-part commentary for the Brookings Institution. Startz finds that while unfunded teacher pensions are a “disaster waiting to happen for taxpayers,” most pension systems actually hurt teachers too.

Teachers’ pensions are far from generous for most. Relative to Startz’s (rough) estimate of $33,000 for the average annual pension of a college-educated worker, the median state’s average pensioner received only $21,000.

Even more surprising is how few teachers receive any benefits. Startz cites research showing that half of all teachers don’t qualify for pension benefits at all. In the nation’s capital, 70% of teachers do not “vest” in their benefits — i.e. they don’t work long enough for a public employer to qualify for their pension. (Vesting requirements are typically at least five to 10 years of service.)

To make matters worse, when non-vested teachers leave to go to another employer, they often get back less money than if they’d just saved on their own. When a non-vested member leaves a pension plan, they are allowed to take back any contributions they’ve made to the plan. However, there are many plans that do not offer an interest credit on the refunded contributions. Since inflation devalues money over time, it is possible that a refund of contributions has really lost value relative to when the contributions were initially made.

Across the country, 41 states return teacher contributions plus some interest, while six states and the District of Columbia only return employee contributions. In those latter jurisdictions, a teacher leaving a pension plan without vested benefits would be better off leaving their contributions under their mattress than participating in the teachers’ pension system. Bellwether Education Partners found that a teacher making $40,000 per year in a hypothetical plan based on the median assumptions of state plans would face a “savings penalty” of $9,035 by withdrawing early after three years of service.

To be clear, this is not money that teachers have lost. Rather, it is money they should otherwise have received. Pensions are, in the simplest terms, deferred compensation; I forego money today in exchange for more money tomorrow. As put by Startz, the choice faced by public sector employers is, “[p]ay good salaries now and raise taxes to fund them, or pay modest salaries now with the promise of big pensions later.” (Though, this only works if the employer properly funds their pension plan.)

Pension reform isn’t a question of taxpayers vs. public employees. The large number of teachers who not only never receive benefits, but forego money by being part of the system, is proof of this. Instead, pension reform should aim to make government employees’ retirement more equitable for all parties, including the workers themselves.