Pension reform is a perennial issue for the Pennsylvania legislature. After years of insufficient contributions and in the face of a ballooning pension debt, the state enacted a significant package of reforms in 2010. These, however, did little to right the ship in the short run, and pension debt continues to grow - even as the state's contributions have more than tripled and markets have recovered from the financial crisis.
“Ensuring affordability for the state's retirement plans is a worthy aim. But the legislature should also consider whether the current benefit design both promotes retirement security for all public workers and helps the state recruit and retain the next generation of high-quality public servants. ”
Now, as the leaves turn and pumpkins dot lawns, Pennsylvania's policymakers are once again considering changes to the state's pension policies with an eye toward modernizing retirement benefits and putting the plans on a sustainable, secure path once and for all.
Ensuring affordability for the state's retirement plans is a worthy aim. But the legislature should also consider whether the current benefit design both promotes retirement security for all public workers and helps the state recruit and retain the next generation of high-quality public servants. Our recent work for the Manhattan Institute shows how Pennsylvania's current teacher pension plans may be falling short on these two goals.
As in most states, Pennsylvania's teachers participate in a defined-benefit pension plan in which benefits are based on the number of years worked under the plan and the last few years of pay. Benefits under these so-called final-average-salary plans are heavily backloaded; that is, teachers generally earn relatively meager benefits through the first couple of decades on the job and only become eligible for more valuable benefits late in their careers.
Backloaded benefits would not be a big problem if most teachers worked a full career under the same plan and if all those who teach were offered adequate retirement savings at every stage of their careers. But neither of these things appears to be true in Pennsylvania.
According to our calculations, a new, 25-year-old Philadelphia teacher does not earn any retirement compensation (i.e., benefits provided by the state beyond the teacher's contributions) until he or she has been in the classroom for 17 years.
Unfortunately, retirement compensation does not become more rational over time. Teachers earn their benefits in seemingly random spikes as they reach arbitrary career milestones. In his or her 24th year in the classroom, our 25-year-old entrant earns an additional $7,716 in deferred retirement compensation; in year 25, $102,975; in year 32, $54,519; and then a final major spike of $122,355 in year 35.
For a teacher certain to work in the Pennsylvania system for her entire career, it doesn't really matter whether she earns her retirement benefits during year 5 or year 35. But it makes a huge difference for the vast majority of teachers, who will leave the system well before teaching long enough to reach a secure retirement.
Based on figures from the annual reports of the Pennsylvania school employees' plan, only about one in five who enter the system at age 25 will stick around long enough to earn any retirement compensation at all. And only 7 percent are expected to teach long enough to receive the system's last spike, in year 35.
Not only are most of those who teach in Pennsylvania's schools getting short shrift under the current system, but backloaded retirement benefits also result in the state overpaying for classroom experience. When we include differences in both salary and retirement compensation, a teacher in his or her 25th year earns 188 percent of what a fifth-year teacher earns. Such a system would be OK if teachers improved dramatically as they taught for more years. Existing research, however, gives us little reason to believe the performance of the two teachers would differ meaningfully.
For too long, Pennsylvania's policymakers have mismanaged its public retirement systems by retroactively increasing benefits when the plans were flush, and then failing to make adequate payments and severely reducing benefits when the plans became predictably underfunded. But today, the state is moving in a much more positive direction. It is sticking with its 2010 plan to significantly ramp up contributions and is now considering other changes that would place the plans on more secure long-term footing. Current negotiations present a unique opportunity to also consider changes that would allow teachers to earn retirement benefits more evenly across their careers, improving the benefit design for workers and school districts alike.
This piece originally appeared in The Philadelphia Inquirer