The Plans Received Low Marks

The Urban Institute has graded America’s state-run pension systems on their performance in a few areas: their financial strength; how well they provide retirement security to short-term or long-term workers; the workplace incentives they offer various age groups; and whether participating branches of government are funding them properly. Grades for all types of public pensions are available on the Urban Institute’s website, where they can be filtered for individual strengths and weaknesses.

Overall grades for state teachers’ pension plans A B C D F (none) Ore. Mass. N.Y. R.I. Wyo. Conn. Ohio Del. Ky. Ark. Fla. Overall grades for state teachers’ pension plans A B C D F (none) Wash. Me. Mont. N.D. Minn. Vt. Ore. N.H. Mass. Wis. Idaho S.D. N.Y. Mich. R.I. Wyo. Conn. Iowa Pa. Neb. N.J. Nev. Ohio Ill. Ind. Del. Utah Colo. W.Va. Md. Mo. Va. Kan. Calif. Ky. N.C. Tenn. Okla. Ariz. Ark. S.C. N.M. Ga. Ala. Miss. Tex. La. Alaska Fla. Hawaii Source: The Urban Institute and Bellwether Education Partners

No states got an A and only six states received a B: Arkansas, Delaware, Florida, New York, Oregon and Wyoming. Most states — 33 — received a C, while six got a D. The last six — Connecticut, the District of Columbia, Kentucky, Massachusetts, Ohio and Rhode Island — each received an F.

Getting an F could mean the plan offers few rewards for younger workers, is less than 60 percent funded or pays meager retirement income relative to salary, among other problems. Rhode Island improved its plan enough in 2013 to get a B on the new version, but it still has so many people in the older, failing plan that the overall grade was an F.

How Plans Encourage Teachers to Retire in Their 50s

The typical teachers’ pension plan is backloaded, meaning teachers build up benefits slowly in their early years, then speed up and earn the biggest portion just before they retire. But teachers also contribute to their plans at a steady rate, and in the early years of a teacher’s career, a person’s contributions are often worth more than the pension credits earned. If teachers stay on long enough, they will eventually hit a break-even point, where the value of the pension that has been earned is greater than what was paid for it. Few teachers are able to do this, research shows.

A hypothetical example of a teacher’s pension in Missouri $1,000,000 Value of pension 800,000 56 600,000 50 400,000 Cumulative teacher contributions 49 200,000 Teacher starts at 25 46 25 30 35 40 45 50 55 60 65 Teacher’s age when leaving Slow growth before age 46, when pension withdrawals must be deferred to age 60. 46 Faster growth from age 46-49 when a special rule allowing early pension withdrawals with 24 years of service phases in. By age 49, the teacher can start drawing a reduced early pension at 56. 49 At age 50 there is big jump in pension value when another rule makes the teacher eligible to draw a reduced early pension immediately, after 25 years of service. 50 At 31 years a teacher has reached the plan’s “normal retirement age,” and can draw an unreduced pension immediately. If the teacher waits too long to retire, the value of his or her pension will start to taper off. 56 The example assumes the pension fund gets an average annual investment return of 7.75 percent. A hypothetical example of a teacher’s pension in Missouri $1,000,000 Cumulative teacher contributions At 31 years a teacher has reached the plan’s “normal retirement age,” and can draw an unreduced pension immediately. If the teacher waits too long to retire, the value of his or her pension will start to taper off. Value of pension 800,000 At age 50 there is big jump in pension value when another rule makes the teacher eligible to draw a reduced early pension immediately, after 25 years of service. 600,000 400,000 Faster growth from age 46-49 when a special rule allowing early pension withdrawals with 24 years of service phases in. By age 49, the teacher can start drawing a reduced early pension at 56. 200,000 Assumes teacher starts at 25 Slow growth before age 46, when pension withdrawals must be deferred to age 60. 25 30 35 40 45 50 55 60 65 Teacher’s age when leaving The example assumes the pension fund gets an average annual investment return of 7.75 percent. A hypothetical example of a teacher’s pension in Missouri $1,000,000 Cumulative teacher contributions At 31 years a teacher has reached the plan’s “normal retirement age,” and can draw an unreduced pension immediately. If the teacher waits too long to retire, the value of his or her pension will start to taper off. Value of pension 800,000 600,000 At age 50 there is big jump in pension value when another rule makes the teacher eligible to draw a reduced early pension immediately, after 25 years of service. 400,000 Faster growth from age 46-49 when a special rule allowing early pension withdrawals with 24 years of service phases in. By age 49, the teacher can start drawing a reduced early pension at 56. 200,000 Assumes teacher starts at 25 Slow growth before age 46, when pension withdrawals must be deferred to age 60. 25 30 35 40 45 50 55 60 65 Teacher’s age when leaving The example assumes the pension fund gets an average annual investment return of 7.75 percent. Source: Robert M. Costrell (University of Arkansas)

Going in the Wrong Direction

To save money, many states have reformed their teachers’ pension plans. In most cases, these changes have pushed the break-even point farther out into the future. In Massachusetts, they pushed it so far out that no teacher can ever earn a pension greater than the value of one’s contributions, no matter how long he or she works.

Years it will take for teachers to “break even” with their pensions Before the “reform” Since the “reform” Massachusetts Rhode Island 37 years Currently, teachers in Massachusetts will never break even. Hawaii 35 Ohio 35 Illinois 35 Minnesota 34 Maine 34 Maryland 33 California 32 New Hampshire 32 South Carolina 31 Kansas 30 New Mexico 30 Mississippi 30 New Jersey 30 North Dakota 30 Oklahoma 30 District of Columbia 30 West Virginia 30 Alabama 29 Nebraska 29 Arizona 28 Iowa 28 Vermont 28 Missouri 28 Virginia 27 Kentucky 27 Nevada 26 Delaware 25 Pennsylvania 25 Connecticut 25 New York 24 Florida 24 Tennessee 24 Colorado 23 Idaho 23 Wyoming 22 Pension changes in the three states in bold let teachers break even more quickly. South Dakota 22 Georgia 22 Texas 21 Montana 21 Alaska 20 Arkansas 20 Louisiana 20 North Carolina 20 Wisconsin 19 Michigan 14 Indiana 10 Washington 10 Oregon 5 Utah 4 The states in italics have not reformed their plans or the number of years did not change. Years it will take for teachers to “break even” with their pensions Before the “reform” Since the “reform” Massachusetts Rhode Island 37 Hawaii 35 Ohio 35 Currently, teachers in Massachusetts will never break even. Illinois 35 Minnesota 34 Maine 34 Maryland 33 California 32 New Hampshire 32 South Carolina 31 Kansas 30 New Mexico 30 Mississippi 30 New Jersey 30 North Dakota 30 Oklahoma 30 District of Columbia 30 West Virginia 30 Alabama 29 Nebraska 29 Arizona 28 Iowa 28 Vermont 28 Missouri 28 Virginia 27 Kentucky 27 Nevada 26 Delaware 25 Pennsylvania 25 Connecticut 25 New York 24 Florida 24 Tennessee 24 Pension changes in the three states in bold let teachers break even more quickly. Colorado 23 Idaho 23 Wyoming 22 South Dakota 22 Georgia 22 Texas 21 Montana 21 Alaska 20 Arkansas 20 Louisiana 20 North Carolina 20 Wisconsin 19 Michigan 14 Indiana 10 Washington 10 Oregon 5 Utah 4 The states in italics have not reformed their plans or the number of years did not change. Source: The Urban Institute and Bellwether Education Partners | Notes: The years it will take a teacher who was 25 when hired to accumulate pension benefits that will exceed an individual’s contributions. Data includes defined-benefit plans only.

New Hires Make Up the Difference

A traditional pension can be a very attractive benefit, at least for those who work long enough to get back more money than they contribute. But because of high teacher turnover, mobility from state to state and other factors, only a minority of all newly hired teachers succeed in doing that. Some states make it easier than others.