Better Benefits: Reforming Teacher Pensions for a Changing Work Force

Reports & Briefs | August 1, 2010
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In 2002, Pennsylvania legislators thought the state's pension plan was sitting pretty. Feeling flush from the stock market boom of the 1990s, actuaries told the Legislature the fund had $7 billion more than it would need to cover financial obligations to current and future teacher retirees. In response, the Legislature contributed only a tiny fraction of what it had been giving, while simultaneously increasing teacher retirement benefits.

The combination of low contribution rates and enhanced benefits has been haunting Pennsylvania ever since. By early 2010, its $7 billion surplus had vanished, replaced by a $10 billion deficit. The state's head actuary is now projecting that to meet future obligations, state and district contributions will have to increase nearly eight-fold between 2010 and 2014. Pennsylvania's case, unfortunately, is not unusual.

After one of the worst decades in stock market history, the Great Recession has left nearly every state pension plan in a precarious position. Recently, the Pew Center on the States reported that 47 states owe more in pension obligations for current and future teacher retirees than they have on hand. Collectively, the gap between what states have and what they will need totals almost $500 billion. And with Americans living longer and teachers more likely to retire at a younger age, the challenge of paying for teacher retirements will only increase.

Policymakers are beginning to take note of the fiscal problems in teacher retirement systems. States have recently taken action by raising retirement ages, lowering benefit payments, and reducing cost-of-living adjustments. These are small steps toward shoring up the system to help ensure that it remains sustainable in the future.

But the problems with teacher pensions are not just financial. And they do not just affect individual teachers and retirees. The way these plans are structured can negatively influence the teaching work force as a whole. At a time when improving the quality of classroom instruction is a national priority, key structural elements in teacher retirement plans impair the ability of schools to recruit, hire, retain, and compensate high-quality teachers and principals.

For example, while the current set-up works well for those who qualify for it, it shortchanges teachers who leave the profession or switch between state or municipal systems. In other words, it creates some big winners at the expense of many small losers.

It also features elements that compel teachers to stay on the job, regardless of burnout or a desire to pursue a new career, until they reach a certain career milestone, after which they retire immediately or else begin to lose out financially. None of these elements is likely to draw good talent to the field or address the human capital problems that America's public schools are facing.

Underfunded and poorly structured teacher retirement systems are problems that the country cannot afford to ignore. But reforming these systems is complicated and difficult. Recent moves by states to quickly raise revenue or decrease benefits do not provide the long-term fixes needed to fully address fiscal issues as well as human capital or teacher quality concerns. And there are significant political and legal barriers to reforming pension systems, ranging from meeting the interests of powerful teachers unions to amending state constitutions that prohibit any changes.

Still, there are steps that can be taken to modernize the system. Some address the technical aspects or basic structure of plans; others tackle the political obstacles or legal limitations. Some are short term; others are more permanent. They all must be crafted with an eye toward simultaneously creating a sustainable cost structure and improving the quality of the teaching work force.

The Joyce Foundation provided funding for this project. The findings and conclusions are those of the authors alone and do not necessarily represent the opinions of the foundation.