Teachers and Taxpayers Need a New Model for Teacher Retirement Systems

More than 100 years ago higher education in the United States recognized the need to provide an employer-sponsored retirement plan for faculty and staff due to the realities of the educational system from both an employer and employee perspective. The unique nature of employment (especially for faculty) within higher education called for a different approach to retirement than existed in other fields. Thus was born a nationwide retirement system that was designed to recognize both the necessary mobility of faculty between several institutions during a working career and the importance to the institution itself to be able to recruit faculty from this mobile national talent pool.

The very idea that a plan with employee control of the assets was needed to recruit talent is contrary to what many believe in the K-12 teaching world today. In fact, the common belief is that a generous traditional pension plan—which has no individual control on assets—is critical to teacher recruitment. According to the NEA; “Like salary and health benefits, a pension is an earned benefit that encourages people to enter and remain in education over the long term, providing stability and experience.” These seemingly contrary beliefs stem from an understanding of the workforce in question and both ideas have merit.

For decades the ideal in the K-12 teaching professional path was that a teacher would be hired after earning the necessary credentials and would remain teaching in that school or district for the next 35 years. A rich benefits package—including a traditional defined benefit pension plan that offers a guaranteed, formula-based, monthly benefit in retirement based on salary history and service tenure—would aid in attracting young teachers into the position. Additionally, the plan would serve as a “golden handcuff”, discouraging the teacher from leaving the position during her or his career. In a profession that historically was not mobile in nature, this approach was sensible.

The Higher Education Retirement Model

In higher education, then as now, it was recognized (and even encouraged) that faculty would move several times during a career. The retirement system recognized that mobility was needed in order to prevent faculty from retiring into poverty at the end of a productive career. A series of relatively short-term participation in traditional pension plans with several employers would not add up to a financially secure retirement. This is true even if the faculty member stayed long enough to be vested in one or more of the plans. The reduced benefits due to divided years of service would, in almost all cases, be insufficient.

The mobile plan developed in higher education provided individual participant control of the assets accumulated from contributions made by both the faculty member and the employing institution. Vesting was immediate in most cases and the assets would move with the participant to the next employing institution. Contributions would continue to be made with the new employer based on that institution’s retirement plan provisions. The assets previously accumulated would continue to participate in the investment experience of the funds continuously going forward. Upon retirement, the accumulated assets from the various employers contributing during the faculty member’s career would be combined and seamlessly converted to lifetime income with various guarantees.

The elegance of this system is that benefits were provided as if the participant was with one employer for a full career even though any number of career stops actually happened.  This approach benefited the employee, her or his students, and the employing educational institutions.

This mobile plan was not like today’s typical corporate 401(k) plans, where contributions are primarily made by employees and assets are managed by the employee among mutual funds selected by the employer or the employer’s fund advisor. Today’s typical 401(k) does not make any provision for retirement income; rather an employee can convert the fully liquid assets into an income stream on the open market at the end of a working career via the purchase of an annuity.

In the higher education model, the assets were closely controlled among a few investment funds specifically designed for long-term retirement savings. These funds also accumulated retirement income credits during the employee’s career and seamlessly converted them to income upon retirement. While this system has added investment options and distribution methods over time, the components of the original design still exist and can be used by many in higher education.

In trying economic times, like we are experiencing today, it is likely that both employees and employers within higher education appreciate the lifetime income component built into this plan design. This look back at the higher education model was intended to illustrate that a successful employee controlled, mobility-based retirement system has existed for over a century that recognized the needs of a mobile workforce and the needs of employers that had specific workforce objectives relating to that workforce.

Educational employment tenure today and teacher shortages

According to the U.S. Bureau of Labor Statistics, the median tenure of private sector educational services workers was 4.2 years in 2018. State government employees (including public school teachers, public safety and other state government workers) median employment tenure in 2018 was just slightly higher at 5.9 years. This belies the notion that people seek public sector work for permanent, lifetime employment anymore these days, as was assumed in the past. State retirement system data supports these numbers. For example, Pension Integrity Project analysis of Colorado PERA School Division data shows that only 37% of hires remain in the system after five years of service.

This information alone shows that the nature of K-12 teacher employment has changed. As noted, a generation ago the expectation was that a teacher would spend a career within a school or district.  Today, the K-12 teacher market is a mobile one and several stops along a teaching career should be expected. In fact, the teaching profession is consistent with private sector employment today; in 2018 median tenure in all private-sector positions was 3.8 years.

American society today is highly mobile across all professions and retirement plans must evolve to meet the needs of this population. Failure to do so will leave many in this aging society tremendously under-prepared for retirement which will serve to further stress social assistance programs.

Further evidence of the inability of traditional teacher pension plans to help in attracting qualified teaching candidates is in the widespread teacher shortages being seen across the country. According to the Learning Policy Institute’s seminal 2016 report, A Coming Crisis in Teaching? Teacher Supply, Demand, and Shortages in the U.S. regarding teacher shortages:

“We define shortages as the inability to staff vacancies at current wages with individuals qualified to teach in the fields needed. We find strong evidence of a current national teacher shortage that could worsen by 2017–18, if current trends continue. Combining estimates of supply and demand, our modeling reveals an estimated teacher shortage of approximately 64,000 teachers in the 2015–16 school year. By 2020, an estimated 300,000 new teachers will be needed per year, and by 2025, that number will increase to 316,000 annually. Unless major changes in teacher supply or a reduction in demand for additional teachers occur over the coming years, annual teacher shortages could increase to as much as 112,000 teachers by 2018 and remain close to that level thereafter. Based on the evidence available, the emerging teacher shortage is driven by four main factors:

• A decline in teacher preparation enrollments,

• District efforts to return to pre-recession pupil-teacher ratios,

• Increasing student enrollment, and

• High teacher attrition.”

High teacher attrition best relates to the retirement plan issue. Teachers leave a current position for any number of reasons. One reason not widely appreciated is that a young teacher who knows that they do not want to stay in his or her current position indefinitely may also understand that the traditional pension plan will not provide much of a benefit at retirement if they leave after only a few years. Given that understanding, the teacher knows it is best to leave sooner to have a better chance of attaining a new career path or position in which they could stay for an extended part of their professional life. Benefit accruals in teacher pension plans, like all public pension plans, tend to be backloaded and increase with tenure.

While none of this is meant to suggest that traditional pension plans are ineffective designs for full-career employees, it should inform that these plans are not the recruitment tool they once were. In reality, an employee-controlled mobility-based retirement system will aid recruitment in any mobile profession, including teaching, as it has in higher education for more than a century.

Mobile Plan Solutions

Employee controlled mobile plan designs offer many more options today than the typical corporate 401(k) plan. Modern retirement designs, taking the best from both defined benefit and defined contribution plan features, can focus on lifetime income security after a full career and can use cutting-edge technological modeling techniques to mitigate risks and reduce costs. The individual teacher does not have to have an advanced investment experience. The employer needs to have clearly stated retirement plan objectives for the plan designs to be effective, cost-efficient and user-friendly.

Another key benefit of this design construct that is outside the scope of this commentary, but nevertheless important, is that unfunded liabilities will never be accumulated in the modern mobile plan described here. These funding shortfalls, broadly speaking, have gotten worse over time and, as of this writing, are threatening the sustainability of public pensions in a number of jurisdictions.

Conclusion

Teaching is a mobile profession. This is witnessed by the short median tenure in current positions by teachers today as well as by the tremendous teacher shortages existing nationwide. While certainly not solely responsible for the shortages or the short tenures, current traditional pension plan designs are not helping the situation. A retirement plan model created more than a century ago to specifically address the needs of a mobile educational profession should inform plan administrators on what will work today.

Modern retirement plan structures using newly- available technology could meet the needs of teachers in the mobile workforce while effectively mitigating risks to employees and all stakeholders. In addition to meeting teacher needs, these plan structures can help meet employer workforce goals of recruiting talent. And, on top of employer and employee goals, these plans, even if for new hires only, can substantially help address the growing unfunded liability crisis facing many public educational pension systems.