One size fits all, or so they said
Talk of pension reform for K–12 public school teachers is known to spark an array of emotion, ranging from boredom to rage. It's understandable—the issues with traditional pension plans are complex and personal. Yet, it's critical that policy makers, taxpayers, and especially teachers join the conversation.
The Thomas B. Fordham Institute recently released a case study on Florida's teacher pension reform that adds to a growing body of evidence that it is possible to reform teacher pensions and that teachers do in fact want portable retirement plan options. These are important findings that help to debunk the popular myth that all teachers prefer traditional, defined benefit, retirement plans.
The final retirement benefit paid to an employee under a defined benefit plan is a fixed amount determined through a formula that includes years of service, final average salary, and a salary multiplier. In defined benefit plans, employees' benefits are not affected by investment gains or losses. In order for a teacher to receive the full benefit these plans provide, however, they must continue to work as a teacher, typically within the same state, from 25 to 35 years. Otherwise, the teacher incurs significant losses from their retirement wealth. For example, a teacher who splits a lifelong career between two pension plans is estimated to lose over half of their net retirement wealth when compared to teachers who complete a career in a single system. It's like a person who consistently put money into a savings account at one bank, then moved out of state and changed banks but could only take half of their savings with them. This isn't fair and is one of the main reasons StudentsFirst advocates for portable retirement options for teachers.
In the Fordham study, the Florida teacher pension system provided researchers with a unique opportunity to answer the question of whether or not all teachers prefer defined benefit plans. Since 2002, the state has given teachers the option to choose between a defined benefit plan and a defined contribution (DC) plan. From 2002 to 2009, employers were required to contribute 9 percent to both plans.
While the default retirement choice for new Florida teachers was the defined benefit plan, 30 percent of teachers entering the system between school years 2003-04 and 2008-09 selected the defined contribution option. Fordham's data set included 91,899 new teachers—30 percent represents more than a notion. Of course, this finding makes sense, given that over 40 percent of new teachers are career changers and interested in portable plans, and reinforces what we've learned from other reports on teachers' attitudes about pay. A national study released this past July found that of the K–12 teachers surveyed, 29 percent of them supported offering new teachers substantially higher starting salaries in exchange for reduced pension benefits.
Even more compelling is the belief posited by Fordham that the "share of Florida teachers choosing the DC plan likely understates what would be observed had the default option been reversed." The authors support this hypothesis by citing to a study analyzing the default effect on employees at a large private firm, which found that the participation in defined contribution plans increased by 60 percentage points when the defined contribution option was the default. This makes sense—just think about how easy and more comfortable it is to go with the option that is essentially being "recommended" to you by your employer.
The Fordham report illustrates the point many policymakers have been trying to make for years: when teachers are provided a choice in terms of retirement planning, employees will opt into the plan that best serves their needs.
If the demand to provide existing and future teachers with retirement options that better align with their personal preferences wasn't reason enough, researchers have proven that teachers who are not vested, are career-changers, and/or are geographically mobile need fairer retirement options.
The call for "systemic pension reform" is urgent. By design, defined contribution plans cannot be underfunded, unlike defined benefit plans, and address the portability and retirement security young and mobile teachers currently face. With this in mind, state legislators should commit to move forward with establishing an employer-sponsored portable retirement option for all public school teachers, not just the ones who have yet to be hired.
By not offering more portable, flexible, and fair retirement plans, the state is doing its teachers, school districts, and ultimately its students a disservice—particularly when it's clear that defined benefit plans are no longer the main preference of all teachers. Although adopting these kinds of plans will not solve the financial shortfalls already facing states like Pennsylvania and California, it will help prevent future liabilities, lower costs to taxpayers in the long run, and most importantly, acknowledge that teachers are individuals, not widgets.
For more information about the inequities caused by traditional defined benefit plans, please see my last blog on teacher pension reform. You should also check out the Pension Reform article on the ActionCenter's Policy Carousel.
This article originally appeared on StudentsFirst's blog.