Retirement Costs and School Budgets

June 26, 2013

How much and on what terms retired schoolteachers receive pensions differs from place to place and individual to individual, due to varying requirements pertaining to age and length of service. But every state ensures that eligible teachers receive compensation in their golden years, most of them through a pension system. Though the specifics of pension plans vary, the logic behind them is the same: collect dollars and invest them during an employee's working years, and use them to pay the employee a promised amount later, say Dara Zeehandelaar and Amber M. Winkler, researchers at the Thomas B. Fordham Institute.

State and district obligations for teacher retirement costs take two forms: pensions and health benefits. Regarding the former, many states now carry crippling unfunded liabilities.

  • A 2010 report calculated that teacher pensions across the United States were carrying a reported liability of $332 billion, but that their true liability was much higher -- at least $933 billion -- and would inevitably increase in the future.
  • Another study found that, between 2009 and 2012, funding shortfalls grew in 43 states and the District of Columbia.

In addition to retirement income, states and/or districts also provide health benefits to retirees and sometimes to their families. Many fund these plans on a pay-as-you-go basis, which means they haven't set aside money for future liabilities. Yet with baby boomer teachers retiring en masse, and health care costs much higher than a decade or two ago, this balloon payment is also now coming due.

How did this storm arise?

  • Rather than reining in benefits, states were actually increasing them until recently. More than half of them enhanced educator pension benefits from 1999 to 2001.
  • While it's easy for lawmakers to increase benefits, it's exceptionally difficult for them to reduce them. State constitutions almost universally protect public pensions from complete restructuring, and many shield benefits against reductions unless legislators can prove that their alterations are both reasonable and necessary.
  • Public pensions are not subject to the same accounting standards as private funds. This has led to a variety of dubious practices, such as underestimating the present value of future liabilities and allocating single-year returns over a multiyear period.

Put it all together and one can understand the sources of today's pension crisis, a crisis that policymakers, editorialists, analysts and much of the American public are awakening to.

Source: Dara Zeehandelaar and Amber M. Winkler, "The Big Squeeze: Retirement Costs and School District Budgets," Thomas B. Fordham Institute, June 2013.

 

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