Illuminating new research confirms what CF has been saying for years: Pennsylvania’s pension system is a bad deal for teachers. In EducationNext, authors Chad Aldeman and Kelly Robson review state projections on the percentage of teachers who vest in retirement plans. Vesting occurs at 10 years in Pennsylvania, meaning teachers may forfeit their pension benefits if they change careers or move out of state before accruing 10 years of service.
Per Aldeman and Robson, only 36 percent of teachers are projected to vest in Pennsylvania’s pension plan. In other words, nearly two-thirds of teachers will not collect full pension benefits under the status quo system.
It gets worse.
The authors also calculate Pennsylvania’s break-even point—the number of years you must work before earning a future benefit worth more than your own contributions (plus the state's real rate of return on those contributions). Teachers do not break-even until 25 years of classroom service. And fewer than three out of ten Pennsylvania teachers are projected to break even.
These astounding figures underscore that the current pension plan only benefits the few teachers who remain in the system for decades and collect backloaded benefits.
It’s worth reading the entire piece at EducationNext, which examines pension systems in all 50 states, but here are the major findings:
Current teacher pension plans are neither improving the workforce nor providing teachers with adequate retirement savings. Schools are investing billions of dollars in teacher pensions, but they’re getting little return in the way of retention incentives. Meanwhile, teachers are accepting lower base salaries today in exchange for the promise of future retirement benefits, a promise that only a fraction of teachers will ever realize. That disconnect means current teacher pension plans are not working well for teachers, schools, or students.
The defined benefit model also diminishes teacher effectiveness:
First, pension rules can encourage the wrong teachers to stay. Poor-performing or burnt-out teachers who are a few years away from maximizing their future pension benefits are unlikely to leave the classroom if staying on means a far more generous pension. In the typical pension plan for a teacher who begins at age 25, retirement benefits double between age 53 and 60. For these teachers, leaving the classroom means leaving a substantial pot of money on the table.
Second, pension rules can also encourage the wrong teachers to leave. Excellent veteran teachers may want to continue working past year 25 or 30, but the value of their pensions stop growing past that point. By staying on, they postpone withdrawing benefits and ultimately reduce the total value of their pension. This push-out feature is unique to defined-benefit plans; by contrast, retirement plans like a 401(k) continue to grow for each year of work, and do not have these sorts of retirement incentives. In this case, the choice to continue working is a choice to lose out on total retirement wealth.
As Nate recently wrote in the Pittsburgh Post-Gazette, the defined benefit pension model drives up property taxes and puts everyone at risk—employees and taxpayers alike. Clearly, the time has come for responsible pension reform, which protects taxpayers and fulfills our promise to teachers.