Teacher Pensions: Inside Education’s Ticking Time Bomb

We’ve got a problem on our hands. There is pension shortfall of more than half a trillion dollars in America.
Will the teacher pension shortfall deter students from entering the teaching profession? (Nigel Roddis/Reuters)
Feb 1, 2013· 2 MIN READ
Suzi Parker is a regular contributor to TakePart. Her work also appears in The Christian Science Monitor and Reuters.

On top of giving kids the best education possible, teachers across the country are faced with another thing to worry about—their retirement funds.

The news on teacher pensions isn’t good.

Nationally, there is an overall pension shortfall of more than half a trillion dollars in teacher pension funds. It’s a fiscal time bomb that state leaders throughout the country are attempting to control as their legislative agendas rev up.

Pennsylvania Governor Tom Corbett is gearing up to reform that state’s teacher pensions that cost taxpayers $1.5 billion this year and will increase to $5.16 billion in 2019-20. Without reform, the state budget will face deep cuts.

The Chicago Teacher’s Pension Fund is also in trouble. “Our fund had $1 in the bank for every $1 we owed as recently as 2002. Today, we have 57 cents in the bank for every $1 owed,” wrote Kevin Huber, executive director of the Chicago Teachers’ Pension Fund, in a recent op-ed.

For years, teacher pension funds invested money in U.S. and foreign stocks, bonds and private investments. And they still do.

This week, for example, the $1.1 billion Big River steel mill was proposed as a major economic boom to the impoverished Delta area. The Arkansas Teacher Retirement System plans to invest $60 million upfront for 20 percent equity in the mill. The teachers’ board takes up the issue on Monday.

Additionally, teachers and other school workers often paid a percentage of their taxpayer-funded wages into the system.

“The traditional defined benefit systems in most states carry enormous unfunded liabilities and it is difficult to say how they could ever return to long-term financial health,” Sandi Jacobs, vice president and managing director of state policy for the National Council on Teacher Equality, told TakePart. “It is time for comprehensive reform.”

Another problem now is that retiree checks are growing faster than fund income, and stocks hit a low point during the recent recession.

But that’s not all, says Villanova School of Business Economist David Fiorenza.

“Most public school pensions I have seen due to my involvement with public sector consulting or teaching about public sector have shown a very high rate of monthly pensions being paid to the retiree,” he told TakePart. “In some cases, as much as 100 percent of a teacher’s salary is paid as a pension monthly if the teacher has many years of service to the school district. In most cases retirees receiving public pensions earn a higher percent than the private sector.”

A December report by the National Council on Teacher Quality (NCTQ) stated that “the structure of teacher pension systems in the United States is, by and large, untenable.” It estimates that pension systems in the United States have $390 billion in unfunded liabilities. Only ten states, including New York, Washington and Michigan, have well-funded systems.

Who suffers? Teachers. In recent years, states have reduced teachers’ cost of living increases, raised retirement eligibility age, increased teacher contributions and altered benefit formulas. But instead of small changes, some say systemic reform is needed.

Fiorenza says, “Pension plans should always be monitored for performance results, usually quarterly, but also updated with actuarial assumptions every three years to be sure school districts are meeting all the requirements of the current and future retirees.”

NCTQ has several recommendations for states, including that each year a teacher works, pension is accrued in a uniform way; financing of pension systems is responsible and sustainable; and teachers are offered flexible options about how their pensions work.

So far, only Florida, Louisiana, Ohio, South Carolina, Utah and Washington offer flexible plans.

Could such trouble prevent millennials from joining the teacher ranks? Firorenza doesn’t think so.

“My experience shows younger people make a career choice based on wages first and their preference for what they believe may be of interest to them,” he says. “The worker starts to become more concerned about pension as they accrue or acquire years of service in their industry and are in the middle stages of their career.”