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Commentary

Louisiana Undercuts its Public Teachers, New Study Finds

According to a new study by TeacherPensions.org, rising pension costs and backloaded retirement benefits are undermining public school teachers in the Pelican State.

Most state and local teachers participating in the Teachers’ Retirement System of Louisiana (TRSL) are losing out on their own pension contributions, the study finds. Almost half of plan participants — 44% — will eventually leave TRSL before qualifying for any retirement benefits. Another quarter of participants — 26% — will leave having earned less in retirement benefits than the value they’ve put in. Together, roughly 70% of teachers hired in Louisiana are getting no actual “benefit” from their retirement program, according to the study.

This could arguably be one of the worst compensation deals for teachers either in public or private sector. (Oh, and Louisiana teachers also lack Social Security coverage).

Louisiana is just one example, though. Traditional defined benefit (DB) pension plans certainly have their place in the line-up of deferred compensation programs for public sector workers. However, one of the persistent weaknesses in many DB designs is that their benefit structure is backloaded, with employees earning the lion’s share of benefits in their last years before retirement.

To be fair, some advocates for DB plans might argue that the backloaded nature of a pension is a feature, not a bug, for supporting retention. Clearly, though, in the case of Louisiana this is not the case.

According to the Thomas B. Fordham Institute, it takes, on average, 27 years for a typical teacher in the U.S. to just break even with her total contributions made to the DB plan.

In Louisiana, retirement benefits start meaningfully ramping up after the second decade on the job, disproportionally rewarding only a small fraction of educators that stick around longer than 25 years. Such policy, however, ignores the lack of retirement security for all the rest of teachers hired.

Those who leave before qualifying for a reduced or full retirement usually get their own pension contributions, plus interest, back. But they miss out on the contributions their employers made on their behalf, which remain in the system.

The situation gets worse when considering the rising pension contribution rates that besiege Louisiana, and are a serious obstacle to any meaningful increase in teacher salaries. TeacherPensions.org identified TRSL to be among the most expensive retirement systems in the nation.

Given the findings, it is not surprising that TRSL Director Dana Vicknair pushed back, writing in The Advocate that the study findings “contained a number of inaccuracies… Louisiana provides these [pension] benefits at a substantially lower cost than Social Security.”

This statement, however, conveniently ignores the fact that the only reason the normal cost of TRSL is less than Social Security is because the system is using an optimistic 7.7% assumed rate of return to calculate the needed annual contributions. The TRSL actual annual returns averaged out to just 5.03% (geometric average) from 2008 to 2017.

Decades of using unrealistic assumptions has contributed to the TRSL’s poor funded status, requiring significant unfunded liability amortization payments to cover its roughly $11 billion in pension debt. When the cost of amortizing plan’s unfunded pension liabilities is factored in school districts in the Pelican State will be making employer contributions to TRSL in excess of 25% of K-12 teachers’ payroll — which is much more than the total 12.4% cost of Social Security.

(Note: Over 83% of these employer contributions — or 21.2% of payroll — are dedicated to paying down TRSL’s ballooning unfunded pension liabilities. The remaining 4.3% of payroll will go towards prefunding actual retirement benefits (i.e. normal costs) for active workers.)

Even if TRSL were cheaper than Social Security, that statement still misses the main critique from the TeacherPensions.org study — less than a third of teachers hired into the TRSL plan get anything out of it anyway.

As unfunded pension promises and backloaded benefits remain unaddressed, most of teachers that voluntarily or involuntarily choose to leave public employment in Louisiana will be losing out on their pensions. This is a structural crisis for TRSL that needs to be addressed sooner than later.

Anil Niraula is a policy analyst at Reason Foundation.

Niraula holds a BS in Business Management and Administration from Touro University (Moscow), MS in International Business from The University of Edinburgh (Scotland, UK), and MS in Applied Economics from Johns Hopkins University.

He is based in Washington, DC.