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Orange County Register


Correcting The Teacher Pension Issue

July 14, 2014

By Josh B. McGee, Marcus A. Winters

Usually, the focus when considering public pension is on how they are overly generous: taxpayers make up for public school teachers' meager salaries by offering gold-plated retirement packages.

This story, it turns out, is only part of the tale. It's not just taxpayers covering the tab for substantially larger benefits accrued by career teachers. It is young teachers that are footing the bill too.

In New York City's public schools, a 25-year-old who begins teaching today could retire in 38 years with retirement compensation worth about $635,090. That's the equivalent of $16,713 for each year spent in the classroom. Teachers in New York City also participate in social security, adding another 6.2 percent of pay to annual retirement compensation, resulting in total deferred compensation of 19.1 percent of annual pay.

In contrast, the average private sector manager and professional earns retirement compensation equal to only 10.8 percent of annual pay (including social security), according to the Bureau of Labor Statistics. Our hypothetical 25-year-old New York City teacher thus earns retirement compensation nearly twice as valuable as a similarly situated private sector employee.

We've analyzed retirement plans offered to new teachers in the ten largest U.S. school districts. While under most of these systems benefits are more generous, average retirement compensation offered to new teachers is comparable to that offered to similar private sector employees. Across all ten systems, average annual retirement compensation is 13.3 percent of pay — only 2.5 percentage points higher than the similar average for a private sector employee.

Indeed, the current system explicitly relies on short-changing the majority of teachers with paltry retirement savings to fund the generous pensions of teachers who work under a single retirement system their entire careers.

How does this perverse system work? Teachers earn relatively little retirement compensation through much of their careers, usually the first 20 or more years. As teachers near their system's retirement thresholds, they suddenly become eligible for far more valuable benefits, which often grow many multiples in value in just a few years.

Consider yet again our 25-year-old New York City teacher. Had she exited the city's pension system after 20 years in the classroom — perhaps merely to take another teaching job elsewhere in the country —she would have earned the equivalent of only $70,738 in total retirement compensation, roughly $3,537 per year of work (or, only 3.9 percent of pay). But if she were to continue teaching, her subsequent 18 years in the classroom would be much more valuable (about $31,353 per additional year worked), resulting in a nearly nine-fold increase in the value of her benefits.

For a profession like teaching, with high rates of early-career attrition — only around 20 percent of public school teachers, nationwide, remain in the profession for even 20 years — such a system is misguided, paradoxically pushing most teachers even further away from secure retirements. In New York City, only one-third of teachers work long enough to maximize their retirement benefits — in places like Houston (14 percent), Philadelphia (7 percent), and Chicago (4 percent), fewer still.

A recent report by Bellwether Education Partners, for instance, found that only 55 percent of teachers work long enough to vest in their retirement plan — not overly problematic, perhaps, if vesting periods were consistently short. In the 17 U.S. states where teachers don't vest for 10 years, however, this poses a bigger problem.

Happily, the inequity and retirement insecurity caused by benefit backloading can be fixed without abandoning the defined-benefit structure. We recently proposed an alternative defined-benefit plan, called a "cash-balance" plan, which would continue to offer teachers investment protection and lifetime income through annuities. At the same time, cash balance plans would be far less backloaded, providing all teachers with adequate retirement compensation, regardless of tenure. Since our proposed reform simply shifts the timetable of when employees earn retirement benefits, it could be implemented with zero additional cost to taxpayers.

Teachers working under a single system their entire careers would, it is true, earn less under a cost-neutral cash-balance plan. But all teachers would earn meaningful retirement compensation for each year of service.

Let's correct this injustice by adopting a more equitable alternative system that puts all teachers on a secure path to retirement.

Original Source:



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