The Plans Received Low Marks
The Urban Institute has graded America’s state-run pension systems on their performance in a few areas: their financial strength; how well they provide retirement security to short-term or long-term workers; the workplace incentives they offer various age groups; and whether participating branches of government are funding them properly. Grades for all types of public pensions are available on the Urban Institute’s website, where they can be filtered for individual strengths and weaknesses.
Overall grades for state
teachers’ pension plans
A
B
C
D
F
(none)
Ore.
Mass.
N.Y.
R.I.
Wyo.
Conn.
Ohio
Del.
Ky.
Ark.
Fla.
Overall grades for state teachers’ pension plans
A
B
C
D
F
(none)
Wash.
Me.
Mont.
N.D.
Minn.
Vt.
Ore.
N.H.
Mass.
Wis.
Idaho
S.D.
N.Y.
Mich.
R.I.
Wyo.
Conn.
Iowa
Pa.
Neb.
N.J.
Nev.
Ohio
Ill.
Ind.
Del.
Utah
Colo.
W.Va.
Md.
Mo.
Va.
Kan.
Calif.
Ky.
N.C.
Tenn.
Okla.
Ariz.
Ark.
S.C.
N.M.
Ga.
Ala.
Miss.
Tex.
La.
Alaska
Fla.
Hawaii
No states got an A and only six states received a B: Arkansas, Delaware, Florida, New York, Oregon and Wyoming. Most states — 33 — received a C, while six got a D. The last six — Connecticut, the District of Columbia, Kentucky, Massachusetts, Ohio and Rhode Island — each received an F.
Getting an F could mean the plan offers few rewards for younger workers, is less than 60 percent funded or pays meager retirement income relative to salary, among other problems. Rhode Island improved its plan enough in 2013 to get a B on the new version, but it still has so many people in the older, failing plan that the overall grade was an F.
How Plans Encourage Teachers to Retire in Their 50s
The typical teachers’ pension plan is backloaded, meaning teachers build up benefits slowly in their early years, then speed up and earn the biggest portion just before they retire. But teachers also contribute to their plans at a steady rate, and in the early years of a teacher’s career, a person’s contributions are often worth more than the pension credits earned. If teachers stay on long enough, they will eventually hit a break-even point, where the value of the pension that has been earned is greater than what was paid for it. Few teachers are able to do this, research shows.
A hypothetical example of a
teacher’s pension in Missouri
$1,000,000
Value of
pension
800,000
56
600,000
50
400,000
Cumulative
teacher
contributions
49
200,000
Teacher starts
at 25
46
25
30
35
40
45
50
55
60
65
Teacher’s age when leaving
Slow growth before age 46, when pension
withdrawals must be deferred to age 60.
46
Faster growth from age 46-49 when a special rule allowing early pension withdrawals with 24 years of service phases in. By age 49, the teacher can start drawing a reduced early pension at 56.
49
At age 50 there is big jump in pension value when another rule makes the teacher eligible to draw a reduced early pension immediately, after 25 years of service.
50
At 31 years a teacher has reached the plan’s “normal retirement age,” and can draw an unreduced pension immediately. If the teacher waits too long to retire, the value of his or her pension will start to taper off.
56
The example assumes the pension fund gets an
average annual investment return of 7.75 percent.
A hypothetical example of a teacher’s pension in Missouri
$1,000,000
Cumulative
teacher
contributions
At 31 years a teacher has reached the plan’s “normal retirement age,” and can draw an unreduced pension immediately. If the teacher waits too long to retire, the value of his or her pension will start to taper off.
Value of
pension
800,000
At age 50 there is big jump in pension value when another rule makes the teacher eligible to draw a reduced early pension immediately, after 25 years of service.
600,000
400,000
Faster growth from age 46-49 when a special rule allowing early pension withdrawals with 24 years of service phases in. By age 49, the teacher can start drawing a reduced early pension at 56.
200,000
Assumes teacher
starts at
25
Slow growth before age 46, when pension
withdrawals must be deferred to age 60.
25
30
35
40
45
50
55
60
65
Teacher’s age when leaving
The example assumes the pension fund gets an average annual investment return of 7.75 percent.
A hypothetical example of a teacher’s pension in Missouri
$1,000,000
Cumulative teacher
contributions
At 31 years a teacher has reached the plan’s “normal retirement age,” and can draw an unreduced pension immediately. If the teacher waits too long to retire, the value of his or her pension will start to taper off.
Value of
pension
800,000
600,000
At age 50 there is big jump in pension value when another rule makes the teacher eligible to draw a reduced early pension immediately, after 25 years of service.
400,000
Faster growth from age 46-49 when a special rule allowing early pension withdrawals with 24 years of service phases in. By age 49, the teacher can start drawing a reduced early pension at 56.
200,000
Assumes teacher
starts at
25
Slow growth before age 46, when pension
withdrawals must be deferred to age 60.
25
30
35
40
45
50
55
60
65
Teacher’s age when leaving
The example assumes the pension fund gets an average annual investment return of 7.75 percent.
Going in the Wrong Direction
To save money, many states have reformed their teachers’ pension plans. In most cases, these changes have pushed the break-even point farther out into the future. In Massachusetts, they pushed it so far out that no teacher can ever earn a pension greater than the value of one’s contributions, no matter how long he or she works.
Years it will take for teachers to
“break even” with their pensions
Before the
“reform”
Since the
“reform”
Massachusetts
Rhode Island
37
years
Currently, teachers in Massachusetts will never break even.
Hawaii
35
Ohio
35
Illinois
35
Minnesota
34
Maine
34
Maryland
33
California
32
New Hampshire
32
South Carolina
31
Kansas
30
New Mexico
30
Mississippi
30
New Jersey
30
North Dakota
30
Oklahoma
30
District of Columbia
30
West Virginia
30
Alabama
29
Nebraska
29
Arizona
28
Iowa
28
Vermont
28
Missouri
28
Virginia
27
Kentucky
27
Nevada
26
Delaware
25
Pennsylvania
25
Connecticut
25
New York
24
Florida
24
Tennessee
24
Colorado
23
Idaho
23
Wyoming
22
Pension changes in the three states in bold let teachers break even more quickly.
South Dakota
22
Georgia
22
Texas
21
Montana
21
Alaska
20
Arkansas
20
Louisiana
20
North Carolina
20
Wisconsin
19
Michigan
14
Indiana
10
Washington
10
Oregon
5
Utah
4
The states in italics have not reformed their plans or the number of years did not change.
Years it will take for teachers to
“break even” with their pensions
Before the
“reform”
Since the
“reform”
Massachusetts
Rhode Island
37
Hawaii
35
Ohio
35
Currently, teachers in Massachusetts will never break even.
Illinois
35
Minnesota
34
Maine
34
Maryland
33
California
32
New Hampshire
32
South Carolina
31
Kansas
30
New Mexico
30
Mississippi
30
New Jersey
30
North Dakota
30
Oklahoma
30
District of Columbia
30
West Virginia
30
Alabama
29
Nebraska
29
Arizona
28
Iowa
28
Vermont
28
Missouri
28
Virginia
27
Kentucky
27
Nevada
26
Delaware
25
Pennsylvania
25
Connecticut
25
New York
24
Florida
24
Tennessee
24
Pension changes in the three states in bold let teachers break even more quickly.
Colorado
23
Idaho
23
Wyoming
22
South Dakota
22
Georgia
22
Texas
21
Montana
21
Alaska
20
Arkansas
20
Louisiana
20
North Carolina
20
Wisconsin
19
Michigan
14
Indiana
10
Washington
10
Oregon
5
Utah
4
The states in italics have not reformed their plans
or the number of years did not change.
New Hires Make Up the Difference
A traditional pension can be a very attractive benefit, at least for those who work long enough to get back more money than they contribute. But because of high teacher turnover, mobility from state to state and other factors, only a minority of all newly hired teachers succeed in doing that. Some states make it easier than others.
Share of new teachers who will
not break even on their pensions
0
25%
50%
75%
100%
Massachusetts
100
Maine
98
Vermont
96
Mississippi
94
New Hampshire
92
South Dakota
89
Hawaii
88
Nebraska
88
Wyoming
88
Florida
85
New Mexico
84
Arizona
84
Ohio
83
Virginia
83
North Dakota
82
Texas
82
South Carolina
81
Pennsylvania
81
Montana
81
Illinois
80
Colorado
79
Minnesota
78
D.C.
78
Delaware
78
Tennessee
78
Alaska
77
Kansas
76
Georgia
75
North Carolina
75
Oklahoma
74
Maryland
73
Iowa
72
Alabama
71
Louisiana
70
Nevada
68
New York
67
Indiana
67
West Virginia
63
Arkansas
63
Missouri
62
Idaho
62
Connecticut
60
Michigan
60
New Jersey
56
Kentucky
56
California
51
Rhode Island
50
Wisconsin
50
Washington
43
Utah
40
Oregon
37
0
25%
50%
75%
100%
Share of new teachers who will
not break even on their pensions
0
25%
50%
75%
100%
100
Massachusetts
98
Maine
96
Vermont
94
Mississippi
92
New Hampshire
89
South Dakota
88
Hawaii
88
Nebraska
88
Wyoming
85
Florida
84
New Mexico
84
Arizona
83
Ohio
83
Virginia
82
North Dakota
82
Texas
81
South Carolina
81
Pennsylvania
81
Montana
80
Illinois
79
Colorado
78
Minnesota
78
District of Columbia
78
Delaware
78
Tennessee
77
Alaska
76
Kansas
75
Georgia
75
North Carolina
74
Oklahoma
73
Maryland
72
Iowa
71
Alabama
70
Louisiana
68
Nevada
67
New York
67
Indiana
63
West Virginia
63
Arkansas
62
Missouri
62
Idaho
60
Connecticut
60
Michigan
56
New Jersey
56
Kentucky
51
California
50
Rhode Island
50
Wisconsin
43
Washington
40
Utah
37
Oregon
0
25%
50%
75%
100%