If you’re planning to use your teacher retirement plan in the future, it’s a good idea to take a look at what’s happening with state-funded pensions. As more states deal with poorly funded pension plans, they’re increasingly proposing pension reforms. What does that mean for you as you face your future after teaching? Teacher Pension Plan (Serious Questions You Should Be Asking) will help focus the issues.
Are Pension Plans a Bad Deal for Teachers?
Were you attracted to your career by promises of good benefits and a good retirement plan? Learn more about what to expect when you leave the profession.
The TeacherPensions website has an excellent video that explains teaching pensions in three minutes. The video covers some of the key problems with retirement benefits for teachers.
The biggest problems with these pensions include the following:
- Only one in five teachers stay in the profession long enough to collect the full benefits.
- The benefits accrue the most in the final retirement years.
- Teachers who retire in less than 10 years can lose all of their employer contributions.
- The benefits are not portable. Teachers who move to other states can lose half of their benefits.
As the video explains, many teachers accept working for a lower salary, because they believe that they’ll get a generous retirement package. In reality, they are getting the worst of both worlds by settling for lower salaries now and low retirement benefits in the future.
Do you know how well your state’s pension fund for teachers is doing? You can find out at the TeacherPensions website, which issues a grade ranking to every state pension fund. Their report, Retirement Reality Check: Grading State Teacher Pension Plans, asks two important questions:
- How much are the funds paying to retired teachers?
- Are retirement benefits from these states portable?
A Depressing Picture
The report is a thorough assessment of the state of pension funds for teachers. As the authors write, “What we found is a mostly depressing picture. States have set up expensive, debt-ridden retirement systems where most teachers fail to qualify for decent retirement benefits. Without dramatic reforms, they’ll continue to fail teachers and leave in place unfair, unsound retirement systems.”
They suggest three steps that states should take immediately:
- Get finances under control.
- Make all retirement accounts portable.
- Allow teachers to pay into and collect Social Security. (You can read more about teachers and Social Security here.)
In some states, the pension situation is even worse. These states have decided to abandon pensions. Many of them are moving to so-called hybrid plans. States that have adopted these plans include:
- Rhode Island.
A hybrid plan “combines elements of a traditional pension and a 401(K) account,” but “they shift more of the investment risk to the workers.” That’s according to a report in CNN which found that 48 states have adopted some type of pension reform.
After the recession, many pension funds did not bounce back. They were underpaying retirees and were in severe financial straits.
The new plans, however, pay out based on investment returns rather than paying a defined amount. They also require larger contributions from workers and smaller contributions from the state.
Poorly funded benefit plans affect every state. They affect teachers, firefighters, police officers and many state government employees.
According to a report by MSN Money, “Every state has an underfunded pension. The smallest pension funding gap, which is the difference between a state’s pension assets and its retirement benefit obligations, sits at more than $335 million. Pension funding is largely a function of government policy, and failure by lawmakers to adequately manage risk, forecast return on investment and budget for demographic changes can create large pension funding shortfalls.”
The best states for these retirees are Wisconsin, South Dakota, Tennessee and New York. These states all have pension funds that are funded at 90% or better. The worst are Hawaii, Colorado, Connecticut, Illinois, Kentucky and New Jersey. They have a funded ratio of 50% or less. Illinois, Kentucky and New Jersey all have funding ratios of about 30%.
That paints a frightening picture for anyone who’s depending on pension in those states. If you’re counting on a teacher retirement plan from one of the low-funded states, you might be facing some tough choices in the future.
Is the Push for Teacher Pension Reforms Misguided?
Many researchers feel that states are using the problems with funding as an excuse to scrap teacher pensions entirely. Rather than increase the funding, improve management of the plans or allow teachers to take Social Security, they are pushing to just get rid of them.
Teacher Pension Plans Still Work
Teacher retirement plans are still a good option for teachers who are able to take advantage of a well-funded plan after years of working. According to the Center for Labor Research and Education at the University of California, teachers who retired after 25 years could expect much higher benefit payments under a state plan than they could get under a 401(K). The report was published after a majority of states instituted some type of reform to their pension plans.
The report’s authors found that, “For educators who have long been in the classroom and are on the verge of retiring, there is little risk that they won’t receive their full benefits. But for younger teachers or those looking to enter the profession, there is far more uncertainty about school employers moving to the less costly option.”
Writing at K-12 Daily, Alisha Kirby points out that, “According to the National Association of State Retirement Administrators, since the recession began in 2008, 48 states have made changes to their pension plans, which are considered one of the largest draws to the teaching profession. It is perhaps unsurprising that many states report struggling in recent years to recruit and retain teachers.”
Writing for the Economic Policy Institute, Monique Morrissey argues that the claims about teacher pensions being a bad deal are overstated.
“The myth that most teachers get a raw deal while a lucky few receive generous pensions lives on despite having been soundly debunked,” Morrissey writes. “The purveyors of this myth suggest that older, experienced teachers are benefiting at the expense of younger and more mobile peers. They use their flawed research to advocate for replacing teacher pensions with account-style plans, such as cash balance plans and 403(b) plans, which are similar to 401(k) plans.”
Morrissey also corrects the flaws in a Manhattan Institute study that led to the beliefs about teacher retirement plans. She concludes that, “While the existing pension system can and should be tweaked to meet changing needs, it successfully serves the goals of attracting and retaining teachers, promoting orderly retirement and providing retirement security.”
The Debate Goes On
The debates about teacher pensions and pension reform are likely to continue. States are looking for ways to cut funding in many areas. Teachers and other public sector employees will be the first to feel the effects of those reforms.
Let Me Know In The Comments Below!
Have you taken a look at our pension plan lately? Are you a new teacher dealing with a hybrid plan? Let me know what you think. I love hearing from you.
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