Are teacher pensions really that high? Pension puzzles part I

Everyone knows that teachers get great pensions and that those great pensions make up for the less-than-stellar salaries teachers earn. Everyone knows that taxpayers are getting stuck with a huge bill for said pensions and that the money paying for those pensions is money not going into direct education support. Well, the first thing everyone knows isn’t true and the second thing everyone knows doesn’t come close to describing how bad the situation really is.

Teacher pensions are a mess. Understanding what’s going on with teacher pensions is messy as heck. However, some progress can be made if we divide the topic into two pieces: Are teacher pensions really high? (Not so much.) Are teacher pensions really expensive? (Not only expensive, they’re even more expensive than it appears on the surface.) I’ll tackle the first question today, then focus on the second in my next Chalkboard post.

The first thing you should know is that really good data on pensions that’s comparable for teachers and non-teachers is tough to come by. The best source for teacher pension data is probably TeacherPensions.org, a  group that’s trying to straighten out the teacher pension mess. I’ll show you some of their data together with data from other sources for non-teachers.

If we want to ask whether teacher pensions are high or not, we need to begin by asking “Compared to what?” The labor market for teachers is a subset of the more general labor market for college-educated workers. So let me give you two background numbers computed from the Current Population Survey. Among college-educated workers, only 57 percent report that they have an employer-provided pension plan. Almost all public schools provide a pension plan, so in terms of availability teachers are better off than other workers. Except, as we’ll see in a minute, many teachers never become eligible for the offered plan, so the difference isn’t as great as it may seem.

How large are pensions for college-educated workers in general? The number I’ll use as an average benchmark, computed from the Current Population Survey, is $33,281 a year. But this is more of a factoid than a hard number. It’s the average pension for college-educated workers who report being retired and who report pension income—except that I exclude IRA’s, 401(k)’s and the like from reported pension income because the data doesn’t separate out whether these sources include employer contributions or are based in some part on the retiree’s own savings. (A retiree’s own savings aren’t part of the teacher pension numbers, so they should be left out.) In other words, in order to exclude private savings in 401(k)’s, I had to exclude employer contributions as well. So $33,281 is somewhat lower than the truth.

Teacher pensions in comparative perspective

How does $33k compare to teacher pensions earned by recent retirees? Here’s a map, based on data from TeacherPensions.org, that shows the average pension for teachers who retired in the last decade.

In 35 of the states, teacher pensions are lower than our national average of $33,281 for all college-educated workers. In the middle-ranked state, the pension is only $21,355. Even though the comparison numbers are quite rough, what we have suggests that teacher pensions are not out of line with pensions of similarly educated workers. Maybe they’re even a bit on the low side. (Remember though, that the comparison numbers for college-educated retirees may include pensions from multiple jobs. Although, the comparison numbers don’t include anything from employer provided 401(k)’s. Many teachers will also have pensions from non-teaching jobs because they don’t teach their entire career. Since these “other job” pensions aren’t included, the comparison isn’t perfectly “apples-to-apples.”)

On the other hand, you can see that the states marked in dark blue have pensions paying over $60,000 a year! Oh, you can’t see it…it’s too tiny; that’s because the only place with such high teacher pensions is Washington, D.C. The average pension paid in D.C. is fully a third higher than the pension in the second-ranked state (Connecticut). Except, while D.C. is high, it may not be quite so crazy high as it may sound.

The puzzle of social security eligibility

Here’s the next puzzling piece about teacher pensions: In 15 states, teachers are not eligible for social security. One of those “states” is D.C. So part of the explanation for high pensions in D.C. and those other states is that the high pensions are making up for the absence of social security payments. Country-wide, about 40 percent of teachers are left out of the social security system.

Is being left out of social security a big deal? A person who has earned $50,000 a year for the last 20 years would expect, roughly, $25,000 a year in social security benefits. So the absence of social security in D.C., and other states, makes a huge difference in thinking about pensions. (But remember that neither school districts nor teachers in those states have to contribute their share of social security tax, which is around six percent of salary each.) A Brookings study by William Gale, Sarah Holmes, and David John explains the reasons why it would be better to bring all teachers into the social security system. But for thinking about current teacher pensions, that’s not where we are now.

If you think that not being covered by social security is weird, since almost everyone else in the country is covered, let me make it a little weirder. Suppose a teacher has worked part of her career in the covered sector, paying social security taxes and earning credit toward social security on retirement. Now that teacher takes a job in a district which doesn’t participate in social security. It turns out that the teacher loses part of the social security benefits she earned and that she and her employer paid for in the covered sector. A study by Alan Gustman, Thomas Steinmeier, and Nahid Tabatabai finds that teachers in this situation lose about 20 percent of the social security benefits they had earned.

What about teachers who don’t receive pensions at all?

What we have to this point is the idea that teacher pensions might be roughly comparable to other pensions, although there is clearly enormous variability. Except, about half of teachers don’t get teacher pensions at all. As an extreme example, “high-pension” D.C. estimates that four out of five beginning teachers won’t get a cent in pension pay.

Two issues affect whether a teacher gets a pension and whether that pension is worth much. Both are related to the fact that many teachers have relatively short careers in education. In many pension systems, you have to participate for a minimum number of years for the pension to “vest,” i.e. for you to get a right to your employers’ pension contributions. In general, federal law requires private employers to either vest fully after five years or to begin partial vesting earlier, in which case full vesting can stretch to seven years. However, public sector pension plans are allowed longer waits. About a quarter of such plans require 10 years or more for full vesting. So the first short career issue is that many teachers leave teaching before being vested in their pension.

There is enormous variation across states in how many teachers end up with a pension. With a warning that the map isn’t perfect because some states have changed plans, here’s a picture again based on TeacherPensions.org data.

There’s a lot of light blue on that map. That’s a lot of states where many teachers walk away with no benefits at all.

The second short career issue is that many teacher pensions are rigged up to give disproportionately high payments to very long service teachers at the expense of quite low payments to teachers with “short” careers. Sometimes “short” means a couple of decades. Chad Aldeman, Daniel Fuchs, and Leslie Kan have looked at how the value of Illinois’ current pension system varies depending on how long a teacher works. Chad sent me their data.

That’s right, a teacher who retires after 25 years of teaching loses money. How can that be? Teachers, like most of us, make contributions to their pension as does their employer. In Illinois, the system is set up so that the value of a pension for a teacher with 25 years on the job is less than the value of that teacher’s contributions plus accumulated interest.

So what’s the bottom line? Some teacher pensions are indeed very generous, but many teachers end up with only a small pension—or no pension at all. This is a screwy way to run a retirement system, and is almost certainly not an effective way to spend taxpayer money to attract great people into the profession.

And on that issue of what this means from the taxpayers’ point of view, stay tuned to my next Chalkboard post for the bad news.