NIRS Encourages Continued Use of Pensions for Teachers

A report from the NIRS argues how DB plans create more savings and retirement income for teachers than DC plans.

Pensions are a key tool for schools to offer to teachers, the National Institute on Retirement Security (NIRS) says in a new report, “Win-Win: Pensions Efficiently Serve American Schools and Teachers.” Pensions give teachers a tremendous incentive to stay with their employer, benefitting the employer with a professional with years of experience.

“Employers looking for the best outcomes for their students thus should want to keep dedicated and effective teachers in their jobs as long as possible,” NIRS says in its report. “DB [defined benefit] pensions are a well-worn labor management tool to achieve exactly this outcome.”

From the teacher’s perspective, pensions offer higher and more balanced benefits than those from a defined contribution plan, since expenses are shared and are predictable. In addition, funds in the pension plan remain invested, even when a teacher retires.

The higher benefits are particularly true for lower-income and middle-income teachers, NIRS says. “The data shows that income inequality is less for retirees with DBs than those without DBs,” It adds, “DB pensions can help teachers prepare for a decent standard of living in retirement, and they can do so more effectively than DC plans. This is crucial, as Americans generally face a growing retirement crisis” due to the fact that DC plans require Americans to take responsibility to save for retirement.

The NIRS points out that DB pensions in the public-sector encourage employees to save for their retirement; both employers and employees generally share the cost, with both making contributions towards future benefits. The median employee contribution rate was 6.0% in 2015 for state and local government employees who also had Social Security, and 8.1% for those who were not covered by Social Security. In comparison, in DC plans employees typically can choose how much to contribute to a DC plan or they can choose to not contribute at all.

In addition, teacher pensions make it easier to keep money in a retirement plan for retirement. In most cases, teachers cannot access their retirement benefits before they are retired. Only one state allows teachers to take out their own contributions in a pension plan, but there are limits in doing so to ensure as much money as possible goes towards retirement security. In comparison, DC plans often allow for participants to take loans and hardship withdrawals.

Citing data from the National Retirement Risk Index (NIRI) from the Center for Retirement Research at Boston College, NIRS notes that by 2013, the NIRI showed that 52% of American households could expect to make cuts in their standard of living in retirement.

NIRS says it issued this report as some school districts have moved partially away from from DB plans. DC plans lead to higher turnover, NIRS says. However, NIRS concedes that some public pension plans have been underfunded in recent years. They have dealt with this by both increasing contributions and lowering benefits, NIRS says.

In conclusion, NIRS says that schools should remain committed to DB plans while managing “the long-term challenge [of] maintain[ing] these crucial benefits on a sustainable basis by improving states’ pension funding through continued increases in employer contributions.”

NIRS’ “Win-Win” report can be downloaded here.