Vermont Seeks To Shrink Teacher Retirement Loophole

July 30, 2003 ( - The Vermont State Teachers Retirement System (STRS) is looking to curb the practice of public school administrators retiring to collect state retirement benefits only to return to work for the school district.

The problem for the $1.2-billion STRS comes down to the dollars going out the door versus the cents trickling back in.   Employees now contribute 3.54% of their salaries to the retirement fund, which, when coupled with their employer’s contributions, equals total contributions to the system of $38.6 million per year.   During the same year, however, the state pays out nearly $47 million, or an average of $11,700 for each of the 4,000 or so retirees receiving benefits, according to a report by the Vermont Press Bureau.

Further, the imbalance is only amplified when a retiree works while receiving benefits.   “These people are receiving retirement benefits and full pay and they are not paying into the system,” said Cynthia Webster, director of the state retirement system. “The whole purpose of retirement benefits is to provide you with an income when you are no longer working.”

Contractor Clause

The arrangement, which is already in place for more than a handful of retired superintendents, usually comes into play when an educator retires, begins to collect benefits, and then becomes a consultant or an independent contractor who is then hired by the school district to perform the same tasks. While superintendents have primarily used the practice, the board noted that principals and teachers have entered into similar arrangements.

To stop the practice, the STRS board will require any retiree earning pay from a school district to fill out an Internal Revenue Service form proving that they are not employees of the district.   Under the law, retirees are able to keep collecting benefits and work as long as their earnings do not exceed about $23,000.   However, if earnings rise above that level — likely for former superintendents and principals — workers are supposed to resume paying into the system and have their pension payments frozen until they truly retire.