Since the Great Recession in 2008, warnings of an impending pension crisis have been splashed across the business pages of newspapers across the country. Despite these boisterous decrees, America’s public pension funds are stable. We explore the roots behind the false pension crisis narrative and examine the facts.
When promoters of the pension crisis myth attack public pensions, they frequently focus on pensions for public school teachers. Rather than going after firefighters or sanitation workers or other public employees, these anti-pension ideologues direct their rhetoric against pensions that provide a secure retirement for hard-working teachers. In today’s post, we examine the faulty arguments made against teacher pensions and explain how pensions provide the most secure retirement for teachers and other school employees.
The most common argument against teacher pensions is that they reward teachers who stay the longest and don’t benefit short-term teachers. The truth is, while teachers who commit to the profession for the long-term will earn the greatest benefit from their pension, the majority of teachers, regardless of years of service, will be better off in a pension rather than a 401(k).
Much of the sound and fury regarding teacher pensions focuses on the teachers who only teach for a few years. The education policy literature is fairly clear about one point: there is a lot of churn among teachers early in their careers. A decent number of new teachers will only end up teaching for one, two, or three years. Many of these new teachers will realize that teaching is not for them. Teaching is an incredibly challenging profession and is not appropriate or appealing for everyone. Others will teach for a couple of years out of a sense of civic duty, but will then leave the education profession to pursue other career paths. The point of this is to say that the teaching profession becomes much more stable after five years. Most of the teachers who stay for at least five years will end up teaching for the long term.
It is also true that many teacher pension plans have vesting periods of five years or greater. A vesting period is the amount of time an employee needs to work for a specific employer before they are entitled to their full earned benefit, in this case their pension benefit. Public pension plans have these vesting periods for a reason. One of the often overlooked purposes of public pensions is to enable workforce management and promote employee retention. Schools invest a lot of resources in training new teachers. Education research indicates that most teachers do not reach their peak effectiveness until around five years into the profession. Therefore, it is in the best interest of public schools to offer an incentive for teachers to stay so that schools can maximize the return on their investment in these teachers.
Structuring a retirement benefit, such as a pension, to favor short-term teachers is both illogical and inconsistent with practices in the private sector, where employees also face vesting periods for their retirement benefits. Furthermore, in all teacher pension plans, a teacher who leaves before vesting is entitled to their own contributions, often with interest. Let’s say a new teacher teaches for three years and then leaves the profession for other career opportunities. This hypothetical teacher has not vested, but has been required to contribute 6 percent of his salary for the past three years and he will get all of these contributions returned to him. In all likelihood, this is more than what he would have saved had he worked in the private sector, even if he does not receive any employer contributions (because he did not vest). If he also receives the interest on his contributions, then that is an even greater benefit (that he would almost certainly not receive in the private sector).
Why are promoters of the pension crisis myth so intent on attacking teacher pensions? Many of them are also supporters of various education reform movements, such as charter schools and school vouchers. John Arnold, the shadowy hedge fund billionaire who funds many of the attacks on public pensions, is also a strong supporter of education reform and has donated hundreds of millions of dollars to that cause. Many of his allies in the war on public pensions, including Josh McGee and Chad Aldeman, are also critics of traditional public schools. In Michigan, the wealthy DeVos family, which funds many conservative causes throughout the state, made eliminating public pensions their top public policy priority for this year. Over the summer, the Michigan legislature made harmful changes to the public pension system for public school employees in the state. The current U.S. Secretary of Education is Betsy DeVos and she is no friend to traditional public schools.
Despite the often factually inaccurate claims of pension critics, most teachers want pensions and most teachers will benefit more from a pension than they would from a 401(k)-style plan. According to a report released earlier this year, when teachers are given a choice between a defined benefit pension and a 401(k)-style plan, the teachers overwhelmingly choose pensions. Another study focused on California found that 6 out of 7 California public school teachers would be better off with a pension from the California State Teachers Retirement System than with a 401(k)-style defined contribution plan.
“6 out of 7 California public school teachers would be better off with a pension from the California State Teachers Retirement System than with a 401(k)-style defined contribution plan”
Beyond the benefit to individual teachers, public pensions reduce teacher turnover, which reduces costs for public schools (it’s expensive to replace a teacher). By reducing turnover, pensions also increase the overall teaching effectiveness of schools, since more experienced teachers are more effective teachers.
Teachers often earn lower pay than their similarly educated peers in the private sector. Pensions can be a powerful recruitment and retention tool by improving the overall compensation package offered to teachers. For states like Oklahoma that are suffering from a severe teacher shortage, pensions can be key to keeping teachers in the classroom.
Don’t let the promoters of the pension crisis myth mislead you: for the vast majority of teachers, a traditional pension is the best plan for a secure retirement. By helping to retain experienced, effective teachers, pensions make schools better for all students.