Why Total Compensation (and Protecting Pensions) is Key to Addressing the Teacher Shortage

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• On: 08/02/2023 13:30:38
• In: Pension Defense
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By: Hank Kim, Executive Director and Counsel, NCPERS

This article was originally featured in the August 2023 issue of The Monitor. 

As teachers across the country are savoring their last few weeks of summer break before preparing to return to the classroom, schools continue to struggle with attracting and retaining educators.

According to a recent report, 86 percent of school districts are experiencing difficulty hiring new teachers. Some districts have resorted to fast-tracking certifications or reducing the requirements for hiring, but these are not sustainable solutions.

Teachers rightfully complain they are not compensated enough, with the same report finding that 78 percent of educators think that low pay is a serious issue. While some might think teachers have to choose between higher pay and pensions, we believe there is a path forward where teachers are both fairly compensated and have access to the long-term retirement security that defined benefit pension plans afford them.

Pensions continue to be a driving force in retaining teachers and other public servants across the country. While there is ample research on the positive effects on worker retention that occur when employers offer a pension, studies looking specifically at teachers have found they were more likely to leave the profession sooner if their benefits are reduced. 

In order to solve the long-term challenges of attracting and retaining quality educators, looking at the total compensation offered will be key. Critics of public pensions, however, will argue that pensions are not sustainable and that teachers need to choose between salary increases and retirement security. We analyzed a recent article authored by Andrew Biggs, senior fellow at conservative think tank American Enterprise Institute, that makes this case to illustrate the flaws in these ideological arguments.

Biggs asserts that many teacher pension plans are significantly underfunded, reducing resources for teacher pay and benefits. But recent research from NCPERS found that during the past quarter century, the average pension expenditures were 3.6 percent of state and local own-source revenues. The same figure for education expenditures was 33.8 percent. The fact is that pension benefits are mostly funded through state appropriations, and not usually part of education finance foundation formulae from which salaries are paid.

The author attributes the funding shortfalls that teacher pensions face to an “overreliance on the stock market” and the “funding rules these plans follow.” With this oversimplification, he blatantly overlooks other important determinants of funding ratios that must be examined. For example, employer funding discipline. There is ample evidence that skipping and/or making less than the full actuarially determined contribution is the key reason for underfunding. Biggs also fails to mention that almost all plans in the public sector have revised their return assumptions downward.

He concludes with a less than subtle push for 401(k)-style retirement plans, arguing that teachers could benefit by transitioning away from traditional pensions to a “more sustainable and affordable model that frees up resources for improved teacher salaries.” This approach has proven to be more costly for school systems while simultaneously providing less benefits to educators.

Since Alaska transitioned from a defined benefit plan to the “more sustainable” 401(k)-style retirement plan in 2005, it has faced growing challenges with recruitment and retention—in addition to increased costs. In comparing termination rates between the two plans, women in their prime working years have turnover rates 138 percent higher in the 401(k)-style plans; men have turnover rates 189 percent higher. Another study found that pensions provide better retirement income compared to a 401(k) for 80 percent of teachers. As a result, Alaska is losing $20 million each year due to these retention challenges.

Pensions have been proven to be a key factor in retaining top talent, but misinformed and biased attacks continue to argue that they are not sustainable. While true unfunded liabilities may be rising due to many reasons beyond pension managers' control (e.g., economic downturns, demographic changes, etc.), so is the economic capacity of plan sponsors. As long as the ratio between unfunded liabilities and total economic output of state and local governments over the amortization period (usually 30 years) is stable or declining, the pension plans are sustainable. As Brookings and NCPERS studies show, state and local pension plans (teachers and others) are sustainable with moderate fiscal adjustments.

Addressing the teacher recruitment and retention crisis—by looking at the total compensation packages—must take precedence. Governments face competing priorities, but they can afford both pensions and increases in education budgets (where raises typically come from). To do so, however, state and local governments must bring their revenue systems into harmony with the economy.