RELEASE: Traditional pensions provide greater benefit than 401(k)s for U.S. teachers

UC Berkeley Labor Center

Contact: Penelope Whitney, 510-643-8756
Berkeley–A new study from University of California, Berkeley and the National Institute on Retirement Security shows that for the vast majority of teachers, existing pension benefits provides a higher, more secure retirement income compared to a cost-equivalent 401(k)­-style plan. What’s more, pensions keep teachers in classrooms.

Conducted by Nari Rhee, director of the Retirement Security Program at UC Berkeley’s Labor Center, and actuary Leon F. “Rocky” Joyner, Jr. of Segal Consulting, the study shows that switching to an account-based retirement system such as a 401(k) would sharply reduce the retirement income security of most teachers in the U.S.

The study looked at public school teacher career patterns and pension benefits in six states: Colorado, Connecticut, Georgia, Kentucky, Missouri, and Texas, which were chosen to represent geographic and teacher diversity. Concerns over retirement security and attacks on pensions prompted walkouts last year in Colorado, Kentucky, and elsewhere.

A webinar that reviews study findings will be held Thursday, January 17, 11am-noon PST.

“Contrary to the claims made by a number of studies, pensions are good for teachers and they’re good for school systems,” said lead author Nari Rhee. “They generate higher retirement income than 401(k)s for most teachers, and they incentivize experienced teachers to stay in the classroom, reducing turnover.”

“Concerns about improving retirement benefits for the small minority of teachers who won’t stay until retirement are best addressed by modifying traditional pensions for greater portability,” says report co-author Rocky Joyner. “The report finds that switching to a 401(k) will make eight out of ten teachers worse off.”

The report, available online, was conducted for the National Institute on Retirement Security. Teacher Pensions vs 401(k)s in Six States: Connecticut, Colorado, Georgia, Kentucky, Missouri, and Texas compares their pensions with hypothetical 401(k) plans for the teaching workforce in each state. Based on a detailed analysis of retirement system membership data and actuarial assumptions, the study finds that most teachers serving in public schools today can expect a long career in the same state, and will earn pension benefits that are significantly more valuable than what they could expect from a 401(k) with the same contribution rate.

Study findings on teachers in the six states include:

  • Most classroom teaching is performed by long-career teachers who are well-positioned to benefit from a traditional pension. Two out of three (65%) will serve at least 20 years in the same state. The typical teacher will serve 25 years.
  • Pensions keep experienced teachers in the classroom. Seven out of ten teachers (68%) will serve until the retirement age set by their pension.
  • Eight out of ten teachers are better off with a pension than a 401(k). For 77% of teachers, existing traditional pensions provide greater, more secure retirement income compared to an idealized 401(k)-style plan with no investment mistakes. For 81% of teachers, pensions outperform 401(k)s with typical individual investor returns.
  • Most teachers would require substantially higher contributions to realize the same retirement income in a 401(k) as the least generous pension in each state. A typical teacher would require 20-116% higher contributions, depending on the state, largely due to the relative efficiency of pensions.
  • Shifting from pensions to 401(k)s or other account-based plans will increase turnover and significantly reduce the retirement incomes of long-term teachers who conduct most classroom teaching.

The Center for Labor Research and Education (Labor Center) is a public service project of the Institute for Research on Labor and Employment (IRLE) at UC Berkeley. IRLE connects world-class research with policy to improve workers’ lives, communities, and society.