Aldeman: Teachers Need to Build a Nest Egg. Schools Need Teachers to Stay on the Job. Changing Rules on Vesting in Pensions Can Help Both
I’ve never admitted this publicly, but as someone who works on retirement issues, I’m overdue to confess. At my first job at an education policy think tank, I left about six weeks too early. If I had been able to stay another 42 days, I would have been fully vested in my 401(k) plan and my employer would have deposited thousands of dollars into a retirement account on my behalf.
People do this sort of thing all the time, of course, and it’s perfectly understandable. My new job was exciting, and I was going to get a significant salary increase. (For those wondering, the increase did not make up for my lost retirement savings.) Still, I really should have known better. I had co-authored a paper about teacher pensions, and I knew how vesting policies worked.
I suspect there are lots more people like me who make similarly short-sighted decisions.
In theory, vesting periods could provide an incentive for teachers to stay on the job, at least long enough to qualify for a pension. After all, states and school districts spend a total of $50 billion a year on pension payments, and teachers are increasingly taking those pension payments in lieu of salary increases. But when my Bellwether colleague Kelly Robson and I looked at teacher pension plan financial assumptions, we found the opposite: In their official projections, which are based on years of historical data on teacher behavior, no state assumes that pension eligibility will encourage early-career teachers to stay on the job. Due to long vesting periods and high early-career turnover, about half of new public school teachers won’t qualify for any pension benefit at all. Those teachers may not know about their vesting period, may calculate that their pension benefit is too small, or may simply make life decisions without prioritizing the retirement implications, as I did.
Even after vesting, just 1 in 5 young teachers will stay on the job long enough to receive full benefits at retirement. While the state plans rely on all teachers contributing into the system, they count on having to pay full benefits to only the relatively few teachers who remain on the job, in the same state, for their entire career. The vast majority will leave their years of service without accumulating much in the way of retirement benefits.
In my case, my employer saved some money when I left; similarly, states save money when teachers leave before qualifying for a pension. But those savings might be smaller than you’d expect. When North Carolina dropped its vesting requirement from 10 years to five, it found that pension contributions as a function of teacher salaries would need to rise just 0.07 percentage points to cover the additional cost of extra retirees deducting benefits from the system. That’s partly due to how back-loaded most teacher pension plans are, and vesting is by no means a guarantee of a decent pension benefit. Still, dropping vesting requirements even lower would help more new teachers start building up their retirement nest eggs faster. (For those curious, I should note that my current employer, Bellwether Education Partners, has immediate vesting, so our team members thankfully don’t have to worry about these issues.)
My situation isn’t perfectly comparable to the experience of teachers; I actually had it better. For one, I was covered by Social Security, so even though my retirement plan came up a little short, I was at least building up Social Security credits during those years. In 15 states, teachers don’t have Social Security to fall back on, and they’re entirely dependent on their state-run pension plans. It seems particularly cruel for those states to limit who can qualify for pension benefits, especially in states like Connecticut, Illinois, and Massachusetts, which don’t offer Social Security and require a teacher to serve for 10 years before qualifying for a pension through the state system.
The second difference is the length of the vesting period. In my situation, my employer had a three-year graduated vesting period, which meant that I qualified for one-third of my employer’s contribution after year one, two-thirds at year two, and 100 percent on my third anniversary. No state offers this sort of graduated vesting cycle to teachers; they all use a “cliff” vesting approach that’s all or nothing. Additionally, in the private sector, federal law requires that employers with retirement plans begin offering some employer contributions within three years, and all employer contributions by year six. With public-sector teacher pensions, in contrast, there are no federal safeguards. Today, 19 states require more than seven years to vest, and 15 states require teachers to stay 10 years to qualify for retirement benefits.
By imposing long vesting requirements, states are systematically delaying the point when teachers can start building their retirement savings. Meanwhile, vesting requirements do not appear to be an effective retention tool, even according to each state’s own estimates. States should get rid of vesting requirements and save young workers from making the same mistake I did.
Chad Aldeman is a principal at Bellwether Education Partners and the editor of TeacherPensions.org. Bellwether was co-founded by Andrew Rotherham, who sits on The 74’s board of directors.
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