Value of teacher pension plans at ‘lowest point in modern history’

Most of the country’s K-12 public school teachers are not being served well by their retirement plans, as changes to state plans since the Great Recession have undone the decades of progress for educators’ retirement benefits that marked the second half of the 20th century, according to a new report.

The Retirement Security Report, which is produced by the Equable Institute, is an assessment of the quality of retirement benefits for public sector employees. A recent edition of the report, “The National Landscape of Teacher Retirement Benefit Security,” analyzed retirement benefits for the country’s K-12 public school teachers, exploring whether educators have access to adequate income during their post-working years. The authors define adequate retirement income as at least 70% replacement of pre-retirement income. The Equable Institute is a bipartisan nonprofit that works with public retirement system stakeholders to solve pension funding challenges.

According to the report, those who work their entire careers as teachers and leave at retirement age enjoy solid retirement benefits – and most everyone else does not.

“Unfortunately, society has been asking teachers to hang on and battle through challenging working conditions without recognizing that at the same time it is asking teachers to do more for less,” the report said. “Even as average salaries have increased, we find that the value of retirement benefits has been steadily decreasing over the past few decades.”

Teacher retirement systems serve well those teachers who spend their full working career covered by the same retirement plan. According to the report, 219 of the 264 classes of retirement benefits in the study that enroll teachers adequately serve those members who fall into the “full career educators” category. However, the report said, “teacher retirement plans should not only be for those who spend their whole career in the same place.”

The success of the plan falls steeply for medium-term workers, who are defined as teachers with 10 to 20 years of service under the same retirement benefit tier. In their case, only 12 of the 264 classes of retirement benefits serve them well.

“The notion that a teacher or a public school employee could put in up to 20 years of service and still not be on a path to retirement income security should cause policymakers to reflect seriously on the quality of pension benefits being offered,” the study’s authors said.

With that in mind, the report notes, “the stakeholders in retirement systems, including labor leaders, should not simply assume that if pension plans are serving ‘full career workers’ well that they are serving all veteran teachers well.”

Meanwhile, just two out of the 264 plans serve teachers with 10 years of service or less well.

“Those numbers are absolutely unacceptable and suggest a systematic failure to support teachers who spend 10 years or less in the classroom with a path toward retirement income security,” the report said.

The reason for the shortcomings of pension plans for teachers with as much as 20 years of service is that the value of benefits in these plans tends to remain low for the first 15 to 20 years of service, only beginning to spike once someone reaches between 15 and 25 years of service, the report said. Meanwhile, defined contribution and hybrid plans do not serve short-term and medium-teachers well because the plans lack adequate contribution rates from members and employers, leading to a shortage of available benefits.

The report was able to clearly demonstrate how starkly teacher retirement benefits have fallen in the years since the Great Recession. The average new teacher in 1965 earned a pension benefit by age 65 that was worth $720,000, adjusted for inflation, over the course of their retirement life. That figure had climbed to $768,000 by 2005. In sharp contrast, the average teacher starting their career during the 2022-23 school year is projected to have lifetime pension benefits of approximately $668,000.

“This 13% decline in less than 20 years is not only a sharp reduction in the quality of teacher benefits, but it also means that the value of teacher pension plans is at its lowest point in modern history,” the report said.

The reason for the fall is that in the years after the Great Recession, which arrived in 2008, state legislatures created less expensive tiers of pension benefits for new teachers.

In fact, 45 statewide retirement systems introduced new tiers of teacher benefits, and most offered less valuable benefits with lower costs to the state than the existing plans, according to the report. In one particularly dramatic example highlighted by the study’s authors, teachers hired on or before December 31, 2010 in Illinois earn a pension benefit approximately twice as valuable as their counterparts in the state who were hired January 1, 2011 or later.

“Teachers who were already hired before states began creating new tiers of benefits with less value are still going to retire with the benefits they were promised,” the report said. “This means the benefit value reduction is going to be felt primarily by new generations of teachers.”