If someone tells you your kid’s teacher would be better off with a 401(k) than a pension, don’t believe it
Originally published in LA Times, July 18, 2017
Two years ago my beloved high school English teacher Mrs. O-W posted on social media, after locking up her classroom for the last time, “It was a happy place. I will miss both it and the kids, but NO MORE ESSAYS!” After 32 years of service in public education, Mrs. O-W finally left what she calls “the best job ever” in 2015 with a hard-earned pension from CalSTRS, the California State Teachers Retirement System.
Like Mrs. O-W, most public school teachers working today count on traditional pensions — which guarantee a monthly income based on age, salary and years of service — as the main source of financial security in retirement. Forty percent of teachers nationwide aren’t covered by Social Security; pension plans, in which employer and employee contributions are invested in a pooled, professionally managed fund governed by a board of trustees, provide their only source of guaranteed retirement income.
Now teachers across the country are facing aggressive political attacks on their pensions. In 2010 Michigan placed new teachers into a hybrid plan consisting of a significantly reduced pension and a mandatory 401(k)-type plan. Last week, the state’s Republican governor, Rick Snyder, under pressure from right-wing legislators to scrap the pension component, signed a bill that will direct most new teachers into just a 401(k). Pennsylvania also recently passed a hybrid pension bill that pushes new teachers into 401(k)-only plans, and similar efforts are afoot in other states.
As they move to dismantle secure pensions for teachers, GOP politicians are starting to argue that eliminating guaranteed pensions is what’s best for teachers. They base this claim on dubious research, sponsored by anti-pension groups, that uses high attrition rates among entering teachers to claim that “most teachers” don’t stay in their jobs long enough to get a decent pension.
It’s true that 40% of new teachers are likely to leave in the first five years. But the vast majority of the teaching profession consists of teachers who stick it out. Anti-pension studies obscure this by weighting teachers who work three months and leave, never to return, exactly the same as those who work 30 years and occupy a much greater share of teaching positions. Among all working teachers, from fresh-faced novices to experienced veterans, it turns out that Mrs. O-W’s long career is typical in California, and it’s likely not far from the national average.
The UC Berkeley Labor Center analyzed how long most teachers stay in the classroom in California based on CalSTRS demographic data for all active teachers and on detailed actuarial studies on statewide teacher turnover. We found that three out of four teachers currently working in the state will put in at least 20 years before leaving, and half will put in 30 years or more. Nearly 9 out of 10 will stay until at least age 55, and the average classroom teacher will work in California schools into their 60s. Our study was funded by CalSTRS, but anti-pension researchers have not been able to refute the fact that most classrooms in the state are occupied by long-term teachers.
Although we don’t yet have career projections at the national level, we know that California is fairly typical in terms of average teacher experience. Data from the National Center for Education Statistics shows that a large majority of teachers currently working in the U.S. have made it past the early years when most new teachers quit. We can surmise, then, that as in California, they will probably stay in the classroom for decades.
Teacher pensions are designed to encourage this kind of commitment to the profession. Vesting typically happens after five years of service (if teachers leave before then, the contributions they’ve paid into the system are refunded, plus modest interest). Pension amounts build up slowly at first, then more and more quickly, providing an incentive for experienced teachers to stay. But around age 65, benefits flatten out, encouraging teachers to retire rather than burn out.
And, our research shows, by the time most active teachers leave service — in their early 50s or later — they will be far better off with their pensions than they would have been with 401(k)s.
Using the teacher longevity data we calculated, we compared current levels of CalSTRS benefits with the yield from an idealized 401(k). We found that 86% of working teachers in California will get higher retirement income from the existing pension than they would from even a best-case-scenario 401(k).
In fact, a 401(k) plan would provide 40% less retirement income for the typical California classroom teacher compared with the current pension, which is consistent with rigorous studies in other states, including one commissioned by the Colorado legislature and another conducted in Texas.
Traditional pensions attract recruits to the profession and keep experienced teachers in the classroom. Doing away with pensions would increase teacher attrition and, worse, severely diminish the retirement security of those like Mrs. O-W who commit to our children long term.