Minnesota’s teacher pension system could be better
“I’m sticking it out so that I can get a better pension,” is what I’m often told by burnt out teachers who are still several years away from retirement.
Unfortunately, the way many pension plans are set up end up only serving some teachers very well versus most teachers well, according to a report on states’ teacher retirement systems by the Bellwether Education Partners.
For Minnesota, the financial health of the Teachers Retirement Association (TRA) — which is the single default defined benefit pension plan for the majority of teachers in the state — affects the fund’s long-term viability and its ability to offer real retirement security. If the TRA pension fund is not appropriately reformed, Minnesota educators may not get the retirement benefit they have been promised.
But “reforms to date have nibbled around the edges of the challenges with pensions,” states the Bellwether study.
Piecemeal efforts to increase contribution rates, reduce benefits for new teachers, raise the retirement age, or modify benefit formulas have slowly eroded benefits for teachers but failed to address the fundamental challenges in how teacher retirement plans are structured.
Not only do retirement systems have to balance the needs of teachers who serve for varying years — fewer than 10 years, more than 10 years but leave before retirement, their entire career — but also the taxpayers who provide the wages for government employees and help financially cover the promised benefits.
Given the competing interests of these different constituent groups, paired with the politics of pension reform, improving pension systems becomes particularly difficult, continues the report.
First, pension reform requires tolerating short-term pain for long-term gain; some reforms made today will not show benefits — for teachers, schools, or public finance — for decades. Politicians are not incentivized to take a hit when the benefits will not materialize until long after they have left office or retired and, conversely, are incentivized to kick hard decisions down the road.
Second, pension reform pits a small, organized constituency of teachers who benefit the most from traditional pension plans (i.e., veteran teachers) against a large, unorganized constituency with diffuse interests (i.e., taxpayers and teachers who, for whatever reason, do not teach long-term in one state).
Finally, pension plans are complex and opaque; it is difficult for a casual observer to assess the state of teacher pensions, let alone discern the implications of reform for teachers, schools, or taxpayers. Each challenge makes pension reforms one of the most fraught public policy questions in the sector.
South Dakota leading the way
The Bellwether study found that the state with the closest ideal teacher retirement system is South Dakota, followed by Tennessee and Washington. All three received a grade “B” ranking, as the report states that even these systems have room to improve.
The ratings measure how well a state serves the different constituent groups affected by the state’s retirement system overall. So, a state’s pension system may serve short-term teachers well but not long-term teachers or taxpayers but score higher because of lower unfunded liabilities, less strain on a state’s public finances, etc.
For South Dakota,
strong scores on amortization cost, amortization period, normal cost of benefits, and overall funding level suggest lower liabilities and good fiscal management. Second, its strong scores on vesting period and interest credit on early withdrawal suggest higher-than-average portability for short-term teachers.
Minnesota can do better
So, how does Minnesota measure up?
With a “D” grade, the state’s teacher retirement system comes in at 17th overall. For how it serves long-term teachers (those who stay for their entire career), the defined benefit plan gets its highest grade, a “C,” while receiving “D” grades for how short-term (less than 10 years) and medium-term teachers (those who stay for more than 10 years but not until retirement) are served. Minnesota’s teacher retirement plan also received a “D” for how well it serves taxpayers.
Minnesota does not offer teachers alternative retirement options outside of its default single defined benefit pension plan. And because Minnesota’s pension plan is not fully portable, teachers who leave the system early cannot even take at least a partial employer contribution with them (which could be part of the reason why teachers aren’t retiring early). If they decide to withdraw what they contributed to the plan, they will only receive their contributions plus interest (or, basically the same amount they would have earned by putting the contributions into a savings account).
In addition, the system’s amortization period is 28 years — meaning the state expects it to take 28 years to pay down the plan’s unfunded liabilities.
Considering a hybrid plan (which incorporate features from both defined benefit and defined contribution plans) could help bolster the plan’s adequacy and put less strain on the state’s public finances.