As Teacher Pensions Turn 125, the Old Lessons Learned Are Still Relevant
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As Teacher Pensions Turn 125, the Old Lessons Learned Are Still Relevant

The failure of America's first public teacher retirement plan offers valuable insights for today.s policymakers.

The first public school teacher pension plan in the United States was established 125 years ago in New York. While that initial system went bankrupt 21 years after its founding, the debate over the plan’s creation and its structural flaws still offer important lessons to us today.

Early Debate

The debate over public teacher pensions dates back to at least 1876, when two New York Republican state legislators—Senator William Woodin and Assemblyman James Husted—introduced a bill to provide pensions to male teachers after 30 years of service and female teachers with 25 years of service. The New York Times supported the measure in an April 24, 1876 editorial, making arguments that might resonate with modern education reformers.

The Times began by noting that public education limited opportunities for teachers:

It is safe to conclude that, if the public schools were abolished, private schools would spring up, giving employment to teachers equal and perhaps superior in number to those of the public schools. These private schools would have smaller classes, less system, greater variety of methods, and, necessarily, a more active demand for teachers. In substantially suppressing private schools, as in any sense competitors with the public schools, the State limits the opportunities of those who seek employment under it in this service. One effect which this has is to make teaching in the public schools a transient occupation. Very few men and a still smaller number of women enter the calling with any hope of acquiring even a modest competence in it, still less with any notion that by remaining in it they can achieve any considerable honors or satisfy any but the most insignificant ambition.

The editorial concluded that some incentive was needed to make teaching in public schools something other than a transient occupation. The solution, they decided, was to offer a pension as a reward for a long period of service. The option of raising teacher compensation and offering them more autonomy was not on the table.

While transient teachers may not have been attractive in the 19th century, it could improve education today. Many gifted young people are motivated to teach underprivileged students early in their careers while mature professionals with diverse experiences also become interested in the profession. If talented, motivated Individuals want to devote two-to-four years to teaching, they will generally forfeit any pension benefits because most teacher pension plans today involve at least a five-year vesting period, if not longer.

The 1876 legislation failed as did a number of subsequent attempts, but a robust debate continued not only in New York, but in other parts of the country as well. In 1892, the Journal of Education invited several experts to contribute essays on the topic. U.S. Commissioner of Education, W. T. Harris, expressed skepticism of teacher pensions, arguing that they “would tend to lower salaries actually paid from year to year” and concluding:

[M]y personal feelings would lead me to urge anything that can in anywise make the work of the teacher more pleasant, and attract better and abler persons to enter it. Inasmuch as the establishment of pensions is likely to diminish annual salaries, I think it will be likely to keep out of the work the more enterprising and adventurous class of men and women and therefore injure the cause.

But other commenters favored pensions, making arguments like those advanced in the Times 16 years earlier. One writer, L.R. Klemm, noted that teachers were already receiving pensions in 10 European countries, including Germany, France and Russia.

Creation and Failure of the New York Teacher Retirement Fund

The New York State Legislature finally authorized teacher pensions in 1894. The law was limited to the New York City (Manhattan) Board of Education and required longer terms of service than the 1876 bill. Male teachers could receive a pension after 35 years of service; female teachers after 30 years of service. The pension was 50 percent of salary with a cap of $1,000 (equal to about $30,000 in current dollars).

Unfortunately, the measure was not actuarially sound. Payments to eligible beneficiaries began immediately, restricting the pension plan’s ability to accumulate assets. Further, there were no actuarially determined employer or employee contributions. Instead, sources of funds for the new benefit were money docked from teacher wages due to absences (paid sick leave was rare in those days), donations and investment income. In his signing statement, then-Gov. Roswell Flower declared, “Had the bill proposed a system of pensions for teachers at public expense I should not have approved of it.” This proved to be penny wise and pound foolish.

By 1897 annual benefit payments exceeded the three revenue sources specified in the original legislation. The state legislature responded by providing new revenue sources: 5 percent of the proceeds from New York City excise taxes and (from 1905) a 1 percent employee contribution.

But along with the new revenues, there were benefit enhancements as well. For example, a minimum pension was added, men were able to retire with 30 years of service after 1901, and after 1907 both men and women became eligible for pensions after 20 years if they were disabled.

By 1914, the New York City Teacher’s Retirement Fund had less than $900,000 in funds to cover almost $70 million in actuarial liabilities—yielding a funded ratio of just over one percent.  In 1915, the fund balance declined to zero, causing missed payments and a freeze on new retirements: teachers eligible to retire were obliged to continue working.

Restructuring

The city formed a pension commission to review the bankrupt teacher pension fund, as well as other troubled municipal plans and make recommendations. The commission concluded:

It is unjust to taxpayers that they should be asked in any one year to meet the obligations for service rendered in the past. … No method other than annual payments on an actuarial basis can be advanced for currently accruing funds to meet liabilities as they accumulate.

In 1917, the state legislature adopted a pension reform that mirrored many of the commission’s recommendations.  These included increased employee and employer contributions, a minimum retirement age (in addition to a minimum service duration) and regular actuarial reviews.

After 23 years, New York City teachers finally had a sustainable pension system. But it was also one that locked in the lifelong service model, making the profession less attractive as a starter or encore career.

Lessons Learned

Offering teachers retirement security is one way to attract more qualified people into the profession. But, if retirement benefits are not properly structured, they can create problems that undermine the quality of education.

Promising retirement benefits and then not properly funding them is a false economy.  Creating a program that theoretically had no public expense, as stated by Gov. Flowers in 1894, led to a collapse of the system in 1915. Teachers who were ready to retire instead were obliged to remain in the classroom. We can be sure that they weren’t pleased, and one can imagine the possible toll this took on their classroom performance.

Offsetting low cash compensation with pension benefits is a mixed blessing. The public schools can attract higher quality professionals this way, but only those who intend to make teaching a lifetime career. Students in public schools thus lose out on the chance to learn from individuals with diverse career backgrounds who may be looking for supplementary income in their 50s, 60s or even 70s. Students may also be exposed to fewer recent college graduates who might like to teach for a couple of years early in their careers before entering a different field.

Fully funding pension benefits when they are earned and providing portability after a short vesting period would have been a better design approach 125 years ago, and it still is today.

Marc Joffe is a senior policy analyst at Reason Foundation.