Teacher Pensions vs. 401(k)s in Six States
A report co-released with the National Institute on Retirement Security
Most public school teachers are covered by traditional pensions that encourage and reward long service. In this study, we determine whether most teachers working in classrooms today can expect to work long enough in the same state to accrue higher benefits under their existing traditional pension, which provides monthly income based on age and service, than they would under a 401(k)-type savings plan of equal cost. We focus on public school teachers in six states: Colorado, Connecticut, Georgia, Kentucky, Missouri, and Texas. As a point of comparison with non-teacher public employees, we also analyze Colorado state employees who are covered by the same pension plan as teachers.
Recent studies from the Urban Institute, Bellwether Education Partners, and other organizations have questioned the adequacy and fairness of defined benefit pensions for teachers, arguing that high attrition rates among new-hire teachers lead to few teachers receiving a meaningful benefit. However, these studies are largely based on hypothetical new teacher cohorts, and are not representative of the teaching profession as a whole.
This study evaluates pensions against hypothetical 401(k) plans, taking into account the teaching workforce as a whole and comparing benefits across plan types on an apples-to-apples basis. For each of the six states in the study, we first analyzed teacher turnover patterns and projected the final tenure—years of service at retirement or separation—for the current teaching workforce, using retirement system actuarial assumptions. Then, for every possible combination of age and service at exit, we compared benefits under the existing teacher pension (using the least generous pension benefit tier, where applicable) and a hypothetical 401(k) with the same contribution rate as the pension. Crucially, our analysis was weighted to reflect the real-life teaching workforce in each state.
We find that traditional pensions are significantly better matched to the typical teacher’s career than 401(k) savings plans in the states in our study. Two out of three teachers (65%) will have worked at least 20 years by the time they leave service. A large majority (77%) of the educators currently serving in Colorado, Connecticut, Georgia, Kentucky, Missouri, and Texas can expect to collect pension benefits that are greater in value than what they could receive under an idealized 401(k)-type plan with no investment mistakes. Ultimately, switching to a 401(k)-type retirement benefit would sharply reduce the retirement income security of teachers who account for a large majority of educational labor.
1. Most classroom teaching is performed by long-career teachers who are well positioned to benefit from a traditional pension.
- Teacher turnover patterns reflect the powerful role of pensions in retaining experienced teachers. Attrition is high in the first few years after hire, but falls off sharply and stays low through mid-career. Attrition spikes at the specific retirement ages of each pension system.
- Teachers in the six states studied will typically serve 25 years in the same state, and leave service at age 58.
- Two out of three teachers (65%) will teach for at least 20 years in the same state.
- One out of ten teachers will leave before vesting, and nearly seven out of ten will stay until at least early retirement age. The remaining two out of ten teachers will vest, but leave before retirement age.
2. For eight out of ten teachers in the six states analyzed in this study, existing pensions—which have a wide variety of benefit provisions—provide greater, more secure retirement income compared to an idealized 401(k) savings plan.
- 77% of teachers in the six states will work long enough in the same retirement system to earn benefits of greater value and security from the lowest-tier pension, compared to an idealized 401(k) with low fees and no investment mistakes.
- The share of teachers who are better off with their pension than an idealized 401(k) ranges from 71% in Georgia to 84% in Connecticut (Exhibit 2). Colorado PERA, which offers greater portability of benefits than other systems, offers superior benefits than a 401(k) for 81% of teachers, despite shorter projected careers than in other states.
- Compared to a slightly more realistic 401(k) with typical individual investor behavior, the lowest-tier pension provides greater benefits to 81% of teachers in the six states.
3. Conversely, only two out of ten teachers in the six states will accrue less benefit under the lowest-tier pension offered by their state, compared to an idealized 401(k)-style plan.
- Across the six states in our study, 23% of teachers will not accumulate enough service in the same retirement system to earn pension benefits from the lowest-tier pension that are greater than benefits from an idealized 401(k). Only 19% are better off with a realistic 401(k) than with a pension.
- This includes 10% of all teachers in the six states who will leave before vesting and 13% who will vest, but leave well before retirement eligibility.
4. Pensions provide significantly more valuable benefits than 401(k)s for typical teachers in all six states. Thus, most teachers would require substantially higher contributions to realize the same retirement income in a 401(k) as the lowest-tier pension.
- For the 68% of teachers who reach early retirement age, pension benefits will significantly exceed idealized 401(k) benefits. For example, early retirement pension benefits for a teacher with the median hire age are worth twice as much as an idealized 401(k) in Colorado, Kentucky, Missouri, and Texas. In Connecticut and Georgia, early retirement pension benefits are worth 50% and 30% more, respectively, than an idealized 401(k).
- Conversely, it would cost significantly more to fund 401(k) benefits that match the value of the pension earned by the typical teacher in each of the six states (Exhibit 3).
- Based on a conservative modeling for a typical teacher with the median age at hire and median projected service, it would cost 20% more to fund a 401(k)-type plan to equal a typical Georgia teacher’s pension benefit. For those in Colorado, Connecticut, and Kentucky, it would cost roughly 40% more. For those in Missouri and Texas, it would cost twice as much. Differences between states reflect variation in career patterns and pension benefit provisions.
- Based on a full-career teacher—hired at age 25 who works 30 years in the classroom—providing the same level of retirement income through a 401(k) account would cost roughly twice as much in Colorado, Kentucky, Missouri, and Texas; and about 60% more in Connecticut and Georgia.
- The main reason why it would cost more to fund a typical teacher’s retirement through a 401(k) is that a pooled pension is simply more efficient than individual investment accounts as a means of financing retirement for a large, multi-generational workforce—as a multitude of studies have shown.
5. Comparing state employees in Colorado with teachers in Colorado and other states, we find that pensions are more valuable than 401(k)s for most employees.
- Colorado state employees are covered by the same pension benefit tier as most school employees in the state. But Colorado state employees tend to be somewhat older than school employees, and their attrition rates are higher in late career. Teachers, in turn, are hired younger and work longer than non-teacher school employees.
- Due to demographic factors including turnover and average life expectancy, the pension cost for Colorado state employees—and thus the contribution rate for the comparison 401(k)—is slightly lower than for school employees for the same benefit provisions.
- Because cost differences between teacher and state employee pensions offset the impact of different turnover rates, an equal share of Colorado state employees and school employees—81%—are better off with a pension than an idealized 401(k).
6. Implications for teacher retirement benefit policy
- As teacher shortages worsen, policymakers should understand that pensions exert a clear retention effect on teachers. Retaining experienced teachers lowers teacher turnover, eases schools’ staffing pressures, and contributes to education quality.
- Shifting from pensions to 401(k)s or other account-based plans significantly reduces the retirement incomes of long-term teachers who conduct most classroom teaching and is likely to increase turnover among experienced teachers.
- While potentially benefiting short-service teachers, shifting to 401(k)s will decrease the pre-retirement and/or decrease the post-retirement income of teachers. This is because teachers will have to reduce their current consumer spending if they save more funds from their pay to preserve their level of retirement income and/or reduce their future consumer spending when they retire in the state with lower benefits.
- States concerned about equity between short- and long-term teachers should consider restoring or augmenting portability provisions in existing pensions. Such provisions include service credit purchases, pension system reciprocity, employer match on employee contribution refunds, and giving all employees the option to use their contributions to purchase lifetime income. Colorado PERA stands out as a system that provides attractive benefits to teachers and other public servants regardless of tenure.
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