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Friends Without Benefits


3/31/2014

Americans are often reminded that it’s never too soon to start saving for retirement. Many of the nation’s public school teachers are doing just that – buying into their state pension system with plans to retire comfortably. However, a new 50-state study from Bellwether Education Partners estimates that nearly 50 percent of all public school teachers will not qualify for even a minimal pension benefit, and less than 20 percent will stay in the profession long enough to earn a normal retirement benefit.

The Joyce-funded report Friends without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security, demonstrates the consequences of poorly structured state and city policies that can exacerbate retirement insecurity for our nation’s teachers. For example, an individual teacher could forfeit up to 6.5 percent of her annual salary for one year, or, due to compound interest, 22.6 percent of her annual salary after three years according to Bellwether’s analysis. To put these penalties in dollar terms, a hypothetical teacher earning $40,000 a year could face a savings penalty of $2,601 for teaching only one year and $9,035 if she left after three years. This money stays with the pension funds and is used to supplement the pensions of the remaining teachers.

Tackling the pension system is critical for reducing teacher turnover and retaining the profession’s most talented educators. Bellwether offers several policy solutions to improve the pension system.

Join Social Security. While Social Security faces its own set of unique problems, enrolling all public school employees in Social Security is another way states and districts could provide benefits to a mobile workforce.

Clean up the financial mess and address human capital problems. States should think long-term about how to get new employees enrolled in more fiscally sustainable and portable retirement plans. At a minimum, states should ensure that teachers leaving the pension plan can take with them their own contributions, a share of the interest those contributions accrued, and a share of the employer contributions that were made on their behalf.

Tackle the right problem. The debate over public sector pensions is often framed in terms of outrage at the pension plans’ generosity. As a result, that’s the issue lawmakers take on, ignoring reforms to how the pension is funded.

Make transparency a priority. Openness is critical as pension reform takes place and changes are made to state and local budgets. States must do a better job of informing teachers and the public about funding decisions.

Design solutions with the weaknesses of 401(k)s in mine. State policymakers should learn from private sector 401(k) plans and not merely try to force teachers into plans modeled after the private sector. Individuals make mistakes, so pension systems should allow choice, but use “nudges” to help individuals make wise decisions. Policymakers should also explore other mechanisms to encourage better saving habits, such as setting mandatory contribution rates and using automatic increases when employees get a raise.

Be Creative. Policy makers shouldn’t feel like they have to choose one pension system over another. There are viable alternate options that can meet the multiple goals of improving sustainability, helping teachers save for retirement, and better aligning retirement policies with today’s education labor market.

What policymakers should not do, however, is perpetuate a system that creates a small number of winners at the expense of a large number of losers.  

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