Teacher Pension Reform Must Be About Cost and Design

Two broad misconceptions about teacher pensions are not an explicit focus of the articles in this volume yet exert a great deal of leverage on the debate and politics surrounding the issue. The first is the idea that teacher pensions are “gold-plated.” As Aldeman and I have noted (Rotherham & Aldeman, 2018), this belief is a myth put forward by, for different political reasons and as part of different political narratives, teachers unions and critics of teacher pensions.

For teachers unions, the gold-plated narrative is a political rallying cry to bolster support for teacher pensions as a generous benefit at risk from reformers. For critics, it fuels a storyline of greedy public employee unions and teachers taking advantage of an overly indulgent public-sector benefit. Neither account tells the complicated story of how teacher pensions do—and, perhaps more importantly, don’t—work for actual teachers.

The gold-plated mythology has staying power because so little attention is paid to the pension issue—especially relative to its fiscal impact. That’s why this volume is such an important contribution, by showing the general landscape and by presenting analyses that go deep on particular dimensions of the behavioral and public-finance aspects of teacher pensions. I’m grateful for the opportunity to offer some thoughts on what this topic means for policy leaders.

As Mihaly and Podurgsky discuss, the cost of teacher pensions has increased substantially over the past 2 decades, and Biggs makes clear the depth of the problem policy makers face. Yet for the most part, this cost structure has not translated into a retirement system matched to today’s labor market or one that works well for a lot of teachers. We’re spending a lot but not getting adequate results. The articles here, from several perspectives, highlight the various inefficiencies and perverse incentives built into the system.

Those inefficiency and cost issues, and the appropriate attention paid to them, can lead to the second misconception: the idea that the teacher pension problem is largely or solely one of cost. This view leads to a reform emphasis on cost savings that often ignores what is arguably the key problem today: Teacher pension systems are poorly designed as a retirement system for today’s teachers. In this volume, Goldhaber and Holden as well as Hosek look at two dimensions of the design question and challenge the conventional wisdom.

If America’s teachers had an effective retirement system that was also expensive, then the debate should turn on how to better finance it and find cost savings. Instead, America’s teachers are locked into retirement systems that are expensive and not serving many teachers well. The problem is one of cost and design.

Given standard vesting rules, more than half of those teaching don’t qualify for any kind of pension or retirement benefit, and only about one in five teachers receives a full pension. The teacher pension system is largely designed for teachers who teach in one state for a long period of time. “Short-term” teachers are frequently dismissed as an afterthought because a retirement system shouldn’t be oriented toward 1- or 2-year teachers. In practice, a whole host of things contribute to even tenured teachers being disadvantaged by today’s prevailing retirement system structure. For instance, if a teacher teaches in three states with vesting periods of 6-plus years—not an outlier example, given that the median vesting period is 7 years (and 10 years in four states)—they can teach for 2 decades and still not be vested in any state.

This problem is compounded by a reform thrust where, again, fiscal issues are seen as the sole or primary issue. To shore up the financial issues that several of the articles in this volume highlight, policy makers are electing to make it harder for new teachers to qualify for pensions. Fewer qualifying participants means lower costs and increased savings. Many states now employ multiple benefit tiers to curb rising costs, with each subsequent tier being less generous than its predecessor.

Rufus Miles, a federal official and author who served Presidents Eisenhower, Kennedy, and Johnson on domestic policy, coined the useful rule of thumb that when considering policy problems, “where you stand depends on where you sit.” If we consider the teacher pension problem as purely one of cost, then the belt-tightening focus has an obvious political logic.

Instead, if we think of teacher pensions as a broader problem of retirement security for the millions of Americans who teach for some period of time or for a career and are expected in the U.S. economy to bootstrap their own retirement, then the problem and solutions look different. This perception is where the issues of design and portability and the contributions of Goldhaber and Holden around teacher preference are important. Kong and Ni likewise look at design questions and highlight an underappreciated aspect of pension policy—financial incentives for long-term teachers to stop teaching, even when they would like to continue.

What are the design issues, broadly speaking? First, as Costrell in particular highlights, teacher pensions are heavily backloaded. Most of the benefits are earned in the final few years of a teacher’s career. Policy makers must consider ways to smooth this curve, given that most teachers teach for a shorter period of time overall or in any particular state (note: non-state-based teacher pension systems exist, but for simplicity, I’m lumping them into that broad bucket and referring to them as “teacher pensions,” even though some states offer other retirement vehicles as well). Smoothing this curve is one way to increase cash compensation for teachers by giving them more take-home pay earlier in their careers rather than backloading it for the last few years via retirement accrual.

In an education system where few teachers spend their full career in one place, an effective approach to retirement must allow people to carry benefits with them to new jobs or careers. This level of portability is not the norm today; backloading and long vesting periods work at cross-purposes with portability. The debate about portability tends to fall into a rut of 401(k)-style defined contribution plans versus traditionally defined benefit pensions. In practice, policy makers can consider a range of options. Portability matters to teachers who, for whatever reason, move and continue teaching elsewhere. It also matters as a retirement security issue more generally if the goal of teacher retirement systems is to help all participants with retirement planning at a level proportionate to their teaching tenure. Here, again, Kong and Ni highlight important issues.

These problems are made more acute because of how teacher pensions interact with Social Security. Several of the articles here discuss Social Security, in particular Biggs, but the intersection of Social Security and teacher retirements could fill an entire volume. For historical reasons, about four in 10 public school teachers nationally don’t participate in Social Security, including every teacher in such populous states as Illinois and Ohio. In theory, an adequate teacher pension should offset this loss over the course of a career, but this isn’t consistently the case (Aldeman, 2019), further disadvantaging teachers.

Again, it’s worth noting that the 30-year teacher is far from the median educator today. And for younger teachers who teach in a state—or, depending on where life takes them, in more than one state—that does not participate in Social Security and has long vesting periods for its pension system, this historical anachronism can substantially set back their retirement savings. Teaching for 6, 7, or even 9 years in a state that doesn’t participate in Social Security and has a 7- or 10-year vesting period is a substantial roadblock to building retirement savings for an individual.

As a result, today’s approach to teacher pensions creates millions of small losers and a much smaller number of “winners,” although not every retiree is enjoying the mythical gold-plated benefits. All told, it’s a daunting political math problem that reformers must contend with—a disengaged population of beneficiaries and organized special-interest groups resisting reform. As we see with other issues with broad benefits but also specific costs—for instance, climate reform or tax reform—these politics are challenging in a legislative system like ours.

In the case of teacher pensions, this dynamic is especially challenging because of specific features of a key stakeholder: teachers unions. In most organizations of all kinds, a vocal minority drives policy and decision making. In the case of teachers unions, the vocal in-group is more likely to be longer-tenured teachers who are more active in union governance. Although as a legal and practical political matter, any broad reform package would respect and protect benefits for current retirees and existing teachers, longer-tenured teachers perceive themselves as having the largest stake in upholding the status quo.

In addition, the wealth held by pension funds is an enormous source of capital for public and private investment, and unions are loath to lose the leverage that comes with the ability to influence the deployment investment capital. The American Federation of Teachers has, for instance, used shareholder leverage to try to influence global education publisher Pearson around education policy debates. Other unions have also tried to influence investment in parts of the sector, such as privatized education or prisons.

Another significant barrier to broad reform is the political timeline. Pension reform is an issue that offers politicians the opportunity to defer politically difficult decisions. Some states have chronically underfunded teacher pensions for decades because politicians know the reckoning will come on someone else’s watch. It’s also why the most popular reforms today just make pensions worse for new teachers, who are the least likely to be paying attention to long-term retirement issues.

Teacher pension reform is, politically, a tall order. However, guideposts exist that suggest what to do and what not to do. In 2021, Bellwether Education Partners ranked state teacher retirement systems across the country (Marchitello, Rotherham, & Squire, 2021). Higher-performing states were a heterogenous group in the ways they approached teacher pensions, illustrating that effective policy is more about plan quality than specific plan type or a uniform approach.

The articles in this volume, likewise, highlight important dimensions and simulations of the impact of several reform ideas. As with any policy issue, the loop of reform, feedback, and further reform will help pilot new ideas and help states learn from one another.

The fiscal fault lines around teacher pensions will continue putting pressure on policy makers to act because the financing of teacher retirement is not trivial for states, and the overall financial picture is daunting—especially when health care costs are factored in. Yet reforms must address the design shortcomings of today’s systems, or we will have less expensive but not more effective teacher retirement. In some cases, effective reform may require additional public spending in the near term. Reformers cannot lose sight of the fact that, at its core, sound teacher pension policy should be broadly about retirement security for individuals and is one lever to make teaching an attractive option for professionals.