Teacher Pensions Could Use Some Modernization

August 3, 2010 (PLANSPONSOR.com) – In addition to their financial woes, public-sector defined benefit retirement plans have a number of structural elements that negatively affect the teaching work force, according to a report by non-profit think tank Education Sector.

Better Benefits: Reforming Teacher Pensions for a Changing Work Force, written by Chad Aldeman and Andrew J. Rotherham, contends that as education leaders and policymakers struggle to identify highly effective teachers, increase their numbers, and distribute them equitably, outdated pension structures often stand in the way.   

The report notes that in an Education Sector survey, nearly four out of five teachers agreed that, “too many veteran teachers who are burned out stay because they do not want to walk away from the benefits and service time they have accrued.” About the same number indicated that making it easier to leave and return to teaching without losing retirement benefits would help attract and retain high-quality teachers to the teaching profession.  

The authors note that the current DB retirement system for teachers punishes them if they leave the profession early or move to another state and encourages them out when they’ve reached their peak benefits even if they want to continue teaching.  

A system that looks more like a defined contribution plan would solve much of the budgeting and underfunding problems states and localities currently face, the report contends, as contributions each year are much more predictable. It could also solve the human capital and portability issues, since school districts could use matching contributions to enhance recruitment and retention, and employees would own their own accounts and could take them with them whether they left their specific position or the profession altogether.   

However, the report says that the flaw of a DC plan is that it places the burden of saving for retirement on workers. Individuals tend to make poor choices with the money they invest, and employees just don’t save enough.  

The authors say cash balance plans have key differences that address many of the weaknesses of both DB and DC plans. They are portable and would not disadvantage mobile workers or create as many perverse incentives, like encouraging a teacher to retire in any particular year. They would be required to cover all workers for at least a certain minimum retirement savings, but would not require workers to manage their own investments.   

Also, because cash balance plans are typically invested in low-risk bonds and other conservative investments, there would not be the same underfunding issues that occur in current DB plans.   

The report notes that the primary weakness in cash balance plans is that the guaranteed rate of return is typically lower than that earned in either DB or DC plans, so in essence, cash balance plans trade security and predictability for lower returns.  

The report offers legal, political, technical, and structural policy recommendations states can pursue “to better meet the needs of a modern teaching work force.”  

The report is here.