The NCSL Blog

27

By Allison Hilz

The debate surrounding public-sector retirement systems—what kind and for how much—is not new.

TeacherThe discussion, which NCSL tracks at length, reaches into both the public and private sectors, raising questions about the viability, cost-effectiveness, and sensitivity to market volatility of defined benefit plans versus defined contribution plans, such as 401(k)’s.

Teachers’ pensions have been, and remain relevant, to this debate. A new report from the National Institute on Retirement Security and UC Berkeley Labor Center, Teacher Pensions vs. 401(k)s in Six States: Connecticut, Colorado, Georgia, Kentucky, Missouri, and Texas, argues that traditional criticisms of defined benefit teacher pensions are misguided.

According to the authors, studies that point to high attrition rates do not distinguish between new hires and longer-term teachers, leading to results that fail to represent the full scope of the teaching profession.

For this study, researchers looked at six states and narrowed the focus to the current teaching force in full, including turnover and years of service, rather than a single cohort, such as teachers with less than five years of service. Then, they compared benefits under existing pension structures to a hypothetical 401(k), using the same contribution rate for each.

They found that, across all six states, eight out of 10 teachers fare better with current pension plans that provide a “greater, more secure retirement income” when compared to the idealized 401(k) plan, which assumes the same contribution rate and average target date fund investment returns.

In Connecticut, for example, 84 percent of teachers are better off with their existing pensions. The remaining 2 in 10 includes teachers who leave prior to vesting and those who vest but leave before they reach eligibility requirements for retirement. Furthermore, for teachers to realize the same retirement income via 401(k), total contribution rates need to increase from 20 percent in Georgia to 116 percent, in Texas.

For lawmakers facing teacher shortages in their states, understanding how pensions affect retention may help in crafting legislation to address the issue. According to the report, two-thirds of teachers will work in the same state for at least two decades and, although turnover is high in the first five years, will typically serve for 25 years.

That said, striking a balance between short and long-term teachers (i.e. portability options, such as service credit purchases or reciprocity) may be of significance when evaluating policy options.

Allison Hiltz is a policy associate in the Employment, Labor and Retirement Program.

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About the NCSL Blog

This blog offers updates on the National Conference of State Legislatures' research and training, the latest on federalism and the state legislative institution, and posts about state legislators and legislative staff. The blog is edited by NCSL staff and written primarily by NCSL's experts on public policy and the state legislative institution.