Offer them a deal: a raise in wages in exchange for forgoing defined-benefit retirement plans.
A record number of American public-school teachers have walked off the job over the past two years—and now another strike looms in Chicago. Chief among the teachers’ demands is higher pay. They’re often right—teacher pay is too low—but for the wrong reasons.
Teachers and their unions typically attribute low salaries to flat or falling state spending on education, with skinflint politicians to blame. But in most places education spending is rising. It isn’t showing up in teachers’ paychecks because so much of it gets diverted to pay for expensive retirement benefits for former teachers. Politicians’ overly generous past promises, sometimes made at the behest of teachers unions, are now coming back to bite the education sector.
The Chicago Public Schools have a pension shortfall of $11 billion. Retirement costs devour more than 25% of the money the system receives from the state. Such costly benefits constrain it and other school systems from offering higher salaries to teachers, increasing support staff, and reducing class sizes. This is the under-the-radar driver of teacher protests in Arizona, West Virginia, Kentucky, Oklahoma, Colorado and North Carolina and cities such as Los Angeles and Denver.
For years, states and school districts didn’t save enough money to cover the retirement promises they made to teachers. Now the bills are coming due. They have to be paid; strong contractual protections mean that outside of bankruptcy it is legally impossible to reduce these pensions. It is also morally difficult to cut retiree medical coverage for midcareer employees who have been planning on receiving it.
Today nearly 90% of teachers participate in defined-benefit pension plans. According to a report by the National Council on Teacher Quality, a Washington-based nonprofit, these plans have total estimated unfunded liabilities of more than $500 billion. Consequently most employer contributions aren’t saved for future retirees but used to pay off debt. In Arizona 82.7% of the employer contributions to the teacher pension system goes to paying off unfunded liabilities. Chad Alderman of Bellwethers Education Partners, an education policy group, estimates that West Virginia teachers forgo compensation equivalent to more than 20% of their salaries to pay down pension debt.
The cost of providing health insurance for retired teachers has also been rising. By 2016 states and localities were on the hook for about $231 billion in unfunded nonpension benefit liabilities for teachers and other public-education employees. Because the Los Angeles Unified School District covers retirees, its high health-care costs—$2,300 of the $16,000 it spends per pupil—prevent it from offering teachers even higher salaries.
Although America’s public education systems have accumulated huge debts to finance expensive benefits, only the few teachers who spend their entire careers in a single state or school district will earn full benefits. In many places, it takes 20 years or more of service to qualify for health coverage in retirement and 25 to 30 years to receive a full pension. Meanwhile, 4 of 5 teachers will leave the state or district before earning complete benefits.
Unlike the 401(k) plans that prevail in the private sector, public pensions and retiree health care aren’t portable. Some 75% of teachers are shortchanged because they quit teaching or change districts before vesting or leave when their contributions are still greater than the payout for which they are eligible. The teachers, including most of the younger ones, subsidize the lifers.
These trends belie the argument that “good benefits” are what attracts and retains good teachers. When only 20% of teachers stay in the state or district that provides their retirement benefits for their entire careers, those benefits are hardly sticky. Offering generous retiree health-care coverage may even encourage teachers who qualify to retire early, depriving schools of experienced instructors.
Most teachers today are mobile, and compensation systems should change to reflect that. States should leave the traditional defined-benefit pensions behind and move toward portable defined-contribution plans. That way, teachers who move will accumulate retirement savings and states will begin to reduce their liability. And more of the money in state education spending needs to show up in the paychecks of working teachers.
States could offer teachers a deal: We’ll raise your salary if you switch to a defined-contribution pension plan. Governments would reduce their long-term pension liabilities and teachers unions could claim credit for winning salary increases. States in the South and Southwest, with Republican governments and weaker teachers unions, are well positioned to lead the reform effort.
School districts and states have little choice but to reform. Teacher retirement systems are at the heart of the budget crunch that increasingly leaves teachers, parents, communities and students unsatisfied.
This piece originally appeared at The Wall Street Journal (paywall)
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