We often hear that public school teachers arent paid enough. However, many assume that low salaries in the profession are offset by the generous pensions that teachers get when they retire.
Unfortunately, for the vast majority of those who start working in a Philadelphia classroom this fall, it wont work that way - they will leave the system long before becoming eligible for a significant benefit. In a new report for the Manhattan Institute, we illustrate the unfairness of todays teacher pension system and offer an alternative structure that would provide Philadelphias teachers with a more secure retirement at no additional cost to the taxpayer.
Currently, a teacher who spends an entire career in the Philadelphia public school system can retire with a considerable retirement benefit. For instance, someone who entered a classroom at age 25 could retire 35 years later with the equivalent of about $445,357 in employer-contributed retirement savings.
Not bad. But very few teachers remain in the system long enough to earn such a meaningful benefit. Teacher attrition is very high - the retirement system assumes that a teacher who entered a Philly school at age 25 has only about a 7 percent chance of remaining in the system long enough to become eligible for the maximum benefit.
Those teachers who leave the school system before reaching the plans specified retirement age, for whatever reason, generally will have earned very little retirement savings. Thats because, as is the case in most other school systems, the pension plan for Philadelphias teachers is heavily backloaded.
Teachers earn very meager pension benefits during their first two decades in the classroom and then suddenly become eligible for large payouts as they approach the plans retirement age. The pension system is only able to offer the relatively large retirement payouts for those who stick around for a full career by redistributing pension wealth away from early and mid-career teachers, harming the retirement security of the majority of those who choose to teach.
For starters, it takes 10 years for public school teachers in Philadelphia to be fully vested in the retirement system and thus be eligible for even a dollar of the employers contribution to their retirement. Thats an awfully long time for a profession with a high attrition rate in the first several years of employment.
But even after vesting, teachers earn very little pension savings for many years. Were our hypothetical 25-year-old teacher to leave the system after 25 years in a Philadelphia classroom, he would be eligible for the equivalent of only about $32,000 in employer-sponsored retirement savings. And just one in five teachers even makes it to that point.
We propose to reform the system so that teachers earn pension savings across their careers. Like that of other professionals, a teachers retirement compensation should increase by a percentage of her salary each year, eliminating the severe backloading that is in the current system.
Though this reform would substantially decrease the maximum benefit for the few teachers who retire "on time," it would also dramatically improve retirement security for the vast majority of teachers. Our hypothetical teacher would be better off under our suggested reform up until his 26th year in the classroom - the pension system assumes that this represents more than 80 percent of entrants.
Changing the pension system in this way would offer teachers a more secure retirement path without costing already-strapped taxpayers another dime. Further, though we believe that there are clear advantages to 401(k)-style, defined-contribution plans, the change could be made while maintaining the defined-benefit structure. Thus, our proposed reform does not require the state to impose any additional investment risk on teachers.
In the end, the current system is great for any teacher who is certain to remain in a Pennsylvania public school classroom for an entire 30- to 40-year career. But few of us can so accurately predict our career trajectory when first entering the workforce. And, in fact, the majority of teachers in Pennsylvania do not teach for that long. A smooth-accrual pension system would benefit the large majority of those who only teach in a Philadelphia public school for five, 10, or even 20 years. At no additional cost to the taxpayer, this plan would offer those teachers the retirement security that they deserve.
Original Source: http://www.philly.com/philly/opinion/inquirer/20130924_Reform_teacher_pensions.html