Rising costs of teacher retirement systems do not reflect improved benefits

New data from the Bureau of Labor Statistics show public school teacher salaries rose by 3.2 percent from March 2019 to March 2020. And while teacher salaries have risen over the entire decade by 19.3 percent, teachers’ total compensation (salary and benefits) increased even more, by 28.5 percent, over the same time period, reports Chad Aldeman with Bellwether Education Partners.

The contributing factor? Benefits costs.

Health care and pension payments rose much faster than teacher salaries did and, as a result, benefits are eating up a growing share of teacher compensation. Teacher health care costs rose by 27.6 percent over the course of the decade, well above the rates for wages or inflation, but the real culprit was teacher pensions. Over the last decade, teacher retirement costs soared by 126.4 percent.

Back in 2016…teachers already had higher retirement costs than any other employee group in the American economy. The trend has only continued since then. While the average civilian employee receives $1.97 in retirement benefits per hour of work, public school districts pay retirement costs of $9.35 per hour. Even if you look at it as a percentage of their total compensation package, teacher retirement benefits eat up two and a half times as much as other workers (13.6 versus 5.2 percent). In terms of retirement costs, teachers are even starting to pull away from other state and local government employees.

Source: Bellwether Education Partners/TeacherPensions.org 

High pension costs are a result of unfunded liabilities, and because states continue to promise pensions they can’t afford, these costs consume a higher and higher share of teacher compensation. What do teachers get for these rising costs? Unfortunately, Aldeman continues, not improved benefits. “Today, the costs of paying down unfunded liabilities, not benefits for active teachers, make up the biggest proportion of employer retirement costs.”

While pension plan structures vary from state to state, most states provide a form of a defined benefit plan that promises retirees a lifetime annuity. The funding challenges states face are largely driven by policy choices. The Center has long warned legislators about the trouble Minnesota’s public pension system is in. Our unfunded liabilities per capita are at $20,149 according to calculations by the ALEC Center for State Fiscal Reform. This means every resident in the state is on the hook for $20,149 and will most likely face future tax burdens to assist in fulfilling unfunded promises.

Minnesota needs to consider switching to alternative models that are more fiscally responsible pension plan structures, such as a defined contribution plan or even a hybrid pension plan that offers a small defined benefit pension plan in tandem with a defined contribution plan, similar to a 401(k). The pervasive pension underfunding not only affects current and retired teachers and school district budgets but taxpayers who provide the wages for government employees and help financially cover the promised benefits of defined benefit pension plans.