The news about teacher pension costs this week was alarming: They are going to be higher than expected at a time Indiana, like other states, is struggling to maintain quality education in the face of multimillion-dollar cuts across the state.
A report on the 59 pension funds covering the nation’s public school teachers was hardly reassuring to veteran or prospective teachers, either. The inevitable result of the pension problems will be that teachers assume more responsibility for their own retirement income. Just as workers in other fields have seen employer-paid, defined-benefit plans replaced with 401(k)-style retirement savings, eventually teachers will have to get by with lower publicly paid retirement benefits.
None of the pension funds studied has enough money to pay for the retirement of the teachers they cover, meaning states – or, more accurately, taxpaying residents of states – will have to pay more to cover the pension costs. Of particular concern for Hoosiers is Indiana’s ranking in the cellar of the list, in the bottom five of underfunded plans.
The ranking is largely because Indiana teachers hired before 1995 are in a pay-as-you-go plan. Their pensions, essentially, are not funded at all – the General Assembly must appropriate money every budget to pay the current benefits. Fortunately, Indiana created a true pension fund for teachers hired later, and that account is well-financed. But together, Indiana teacher retirement costs are only about 35 percent funded, according to the report from the Manhattan Institute for Policy Research.
The institute, it should be noted, favors school choice, and it might advance its interests by making the future of public-school financing look bleaker. But there is little reason to doubt the empirical data the report presents.
Indiana is not the only state with worries. Collectively, the report concludes, the nation’s teacher pension funds are short nearly $1 trillion.
For an immediate step, the institute recommends that state pension funds stop operating on the expectation of an 8 percent annual return on investment and present true projections.
The 8 percent level is higher than private plans but allowed by accounting standards.
And, the institute believes, benefits will have to be reduced.
No doubt, the financial realities of the economy are hammering many teachers – and prospective teachers. To add insult to injury, many politicians are justifying budget cuts by criticizing hard-working teachers who struggled for decades to earn salaries and benefits commensurate with their duties.
But the reality is that teachers generally enjoy health insurance and retirement benefits better than those of many of taxpayers. The stock market and economy will rebound, but even if Americans are able to pay the taxes needed to sustain those teacher benefits – and that is questionable – it is doubtful they will have the will.
The report is just another warning that public employee benefits will have to drop to levels closer to those of typical private sector workers.