YOUR BUSINESS AUTHORITY

Springfield, MO

Opinion: Teacher pension system’s generous benefits costly to some

Posted online

Teachers love their pension system. And why not?

They can retire at age 55 with 30 years of service and draw 75 percent of their final average salary for the rest of their lives. For a teacher who becomes a principal or superintendent, this benefit could easily be six figures annually.

But have you ever stopped to ask yourself how the plan manages to achieve this? There is no magic. The plans do not have wizards for fund managers. The answer is much more straightforward: The system redistributes wealth from some individuals to others.

Logic tells us when people receive benefits that far exceed the value of their contributions and interest, the funds must come from somewhere – and they do. They come from teachers who work for fewer years, from teachers with relatively low pay and from future generations of teachers. The same characteristics of Missouri’s teacher pension system that enable some teachers to enjoy a comfortable retirement also create several forms of inequity that could undermine these plans.

Currently, teachers in Missouri (except in Kansas City and the city of St. Louis) contribute 14.5 percent of their salaries to the pension system. The district matches that amount, for a total equal to 29 percent of the teacher’s salary. A teacher who leaves before the five-year vesting period forfeits the district’s match.

But even vesting doesn’t guarantee a teacher will receive full value for their contributions, let alone the district’s match. Because the benefits accrue slowly at the start of a teacher’s career and then rapidly as they approach retirement, a teacher must work more than 20 years just to recoup their own contributions. The teacher who works 15 years and moves because of a spouse’s job in another state, for example, will be leaving money behind that helps fund the generous benefits of others. This is known as intra-generational inequity – within a cohort of teachers, some benefit and others lose.

Another form of intra-generational inequity is the cross-subsidization that occurs between workers with different earnings trajectories. Some teachers, generally in wealthier districts, get very large raises over the course of their careers, but others do not. Teachers who become administrators make even more money. Since pension payouts are based on salaries earned in just the final three years of employment, these individuals receive retirement benefits that exceed the amount of their own contributions to the system over the course of their careers.

Others have to make up the difference. These “others” come, in part, from poorer districts and those with relatively flat salary schedules. Teachers in these districts pay more into the system than they will get out. Their “excess” contributions go to fund the pensions of the former superintendent making $150,000 a year in retirement.

Even though the pension system shortchanges many teachers, it still does not have enough funds to cover all its expected obligations. Therefore, the system must rely on new teachers to fund the benefits of retired teachers.

This is the third type of inter-generational inequity. As generations of teachers contribute less than they receive in benefits, unfunded liabilities grow. In turn, future generations are asked to contribute more to the system. We already have seen individual contributions to Missouri’s Public School Retirement System grow to 14.5 percent from 10 percent in 1995.

Defenders of the teacher retirement pension will be quick to tell us the system is well-funded, by over 80 percent. We can quibble about this calculation another time. They will reiterate the system is well-liked by teachers and claim that retirees are doing well.

To make that argument is to miss the point of this entire article: Unless we tie benefits to contributions, the pension system will continue to favor some at the expense of others.
 
James Shuls is an assistant professor of educational leadership and policy studies at the University of Missouri-St. Louis and a fellow at the Show-Me Institute.

Comments

No comments on this story |
Please log in or register to add your comment
Most Read
Should the city pass a ban on pit bulls within city limits?

View results

SBJ Live logo
MOST-WATCHED VIDEOS
Winding it Down

Kenny Gott, a Certified Financial Planner with Piatchek & Associates and one of Springfield Business Journals Trusted Advisors for 2017, says you need to start planning early for retirement and put a succession plan in place.

Expanding Opportunities Steve Wohnoutka, co-owner of Superior Rents, says finding the right opportunity to expand your business can be difficult. When an equipment company in Wichita, Kansas closed, it presented a suitable …
Successful Succession Bill Nesbitt, Owner of Nesbitt Construction, says he hadn’t originally planned for his son to succeed him as president of their company. Michael Nesbitt spent several years working his way into the …
Ready to Quit - Have You Thoroughly Thought About it? Candida Deckard, one of Springfield Business Journal’s Most Influential Women and the Director of Human Resources and Safety at CNH Industrial Reman, says you need to carefully consider the consequences before you quit your job.
Trusted Advisors - Plan Proactively Megan Creson, an Associate Attorney with Lowther Johnson Attorneys at law LLC, says you need to be proactive in managing your business.