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Roughly three-quarters of states offer teachers a retirement plan that isn’t making the grade, according to a ranking released Tuesday.

Just 13 states received either a B or a C grade overall in Bellwether Education Partner’s latest look at teacher retirement plans. None received an A.

South Dakota, Tennessee, Washington, Utah and New York scored closest, topping the nonprofit organization’s new ranking. Pennsylvania, Connecticut, Kentucky New Jersey and Illinois rounded out the bottom five states.

Most teachers are enrolled in a defined-benefit pension plan, in which teachers contribute a percentage of their salary annually and then are paid a set amount monthly, based on their years of service and final earnings, after retirement.

But states are increasingly putting teachers into plans designed with a defined-contribution element, where the payout is based on annual contributions and investment returns, much like the 401(k).

The authors compare states with pensions alongside states with these alternative plans, ranking the plans based on 15 variables, including investment returns, annual contribution rates, how well a state’s system is funded, how long teachers have to pay into the system before qualifying for benefits and how much teachers can expect to receive after retiring.

“Everyone has room to grow,” says Andrew Rotherham, cofounder at Bellwether and an author of the report. “The laggard states are really laggards, but even the best states have things they can do to improve.”

The stakes for teachers' retirement security are high: For one thing, teachers in more than 12 states — some 40% of all teachers — do not qualify for Social Security, meaning they may not have any guaranteed income in retirement. (In this way, they're like certain other local and state workers who are excluded from the program.) While some long-serving educators receive a comfortable pension to make up for that, many other teachers leave before they qualify for a full payout.

Teachers also earn up to 20% less than similarly educated workers. Reliable retirement income is one of the benefits that's supposed to counter that lower take-home pay and reward workers for a choosing a public-sector job.

But now, states are making pension formulas less generous for new hires, partially in an effort to close unfunded liabilities. And while teachers have access to supplemental savings accounts, called 403(b) and 457(b) accounts, those are plagued with complex rules and high fees.

Of course, teachers aren’t the only workers who may face an uphill battle in saving for retirement. About a third of the nation’s private-sector employees do not even have access to a retirement savings plan at work.

Yet elementary and secondary school teachers are one of the largest professional populations in the country. With some 3.2 million public school teachers, how well pensions serve them is part of a wider conversation about the state of the country’s retirement security.

"It's a personal finance story for millions of Americans," Rotherham says. "If some teachers are getting systematically disadvantaged, there's broader costs to that."

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States with portable benefits rank well

Only four of the top 10 states in the Bellwether's overall ranking offer a traditional pension plan as the default option. Half of the top 10 states offer what are considered hybrid plans, which mix elements of a pension and a defined-contribution plan, a design that critics often say is less generous to teachers.

But one of the main points of the non-profit's report is that it’s not the plan type that makes a state’s offering good or bad: pensions can serve workers well or poorly, and defined-contribution plans may be an improvement or they may be worse.

“Those blunt categories are actually not that useful if you care about the experience of plan participants,” Rotherham says.

Instead of plan design, Bellwether focused on how well retirement plans served different constituencies. The authors created four different profiles, separately considering the variables that affect short-term, middle-term and long-term teachers, as well as taxpayers.

Top 10 Ranking States Grades
Overall rank State Short-term teachers Middle-term teachers Long-term teachers Taxpayers
1 South Dakota B C A A
2 Tennessee D B A B
3 Washington C C A B
4 Utah D C A B
5 New York F D A A
6 Oregon C C C B
7 Idaho D C B B
7 Michigan C C C C
9 Nebraska F C B B
10 Arkansas D C B C
Note: Short-term teachers are those who work fewer than 10 years. Middle-term teachers work more than 10 years but leave before reaching retirement age.
Source: Bellwether Education Partners, Teacher Retirement Systems: A Ranking of the States.

The states at the top of Bellwether’s report tend to have vesting periods (the amount of tenure required before qualifying for benefits) of five years or less.

South Dakota, the top-ranking state, has a vesting period of three years for both the defined-contribution and defined-benefit portions of its hybrid plan, and it pays 6.5% on early withdrawals. Both of those offer a higher-than-average portability for short-term teachers, which Bellwether values.

Plus, the state scores well for relatively low debt payments and a pension system that’s fully funded, meaning the state is contributing enough money each year based on actuarial recommendations to pay future obligations.

New York (No. 5), the highest-ranking traditional pension plan, does not score well in the categories that focus on short-term teachers, with its low teacher contribution rate and 10-year vesting period.

But it makes up for those poor marks with particularly strong performance elsewhere: the state is fully funding the plan, it has no unfunded liabilities and investment returns for the past decade were 9.6%, one percentage point higher than the average for all states.

While the plan adequacy in most of the top-ranked plans — a.k.a how much of a salary the pension plan will replace — hovers between 40% and 60% for a long-term teacher — all the states in the top 10 participate in Social Security. In other words, teachers may only have about half of their final salary replaced via a pension, but they can also count on some Social Security payments as well.

States with unfunded liabilities and no Social Security rank poorly

That’s a big differentiator between states at the top of the list and states toward the bottom. Of the 10 states that rank in the last spots, seven don’t participate in Social Security. Some of those places also have a 10-year vesting period.

That means that, in places like Connecticut (No. 48) and Massachusetts (No. 46), there are people who may teach for up to 10 years and leave with little retirement savings built up. When you leave before vesting, you do get to take any money you contributed into the retirement plan, plus interest that typically ranges from 1.5% to 7%, depending on the state. Yet some states, like Illinois (No. 51), don't pay any interest, require a 10-year period and don't participate in Social Security.

Bottom 10 Ranking States Grades
Overall rank State Short-term teachers Middle-term teachers Long-term teachers Taxpayers
42 Rhode Island F F F F
43 Alaska F F F F
44 Colorado F F D F
45 California F F D F
46 Massachusetts F F D F
47 Pennsylvania F F F F
48 Connecticut F F F F
49 Kentucky F F F F
50 New Jersey F F F F
51 Illinois F F F F
Note: Short-term teachers are those who work fewer than 10 years. Middle-term teachers work more than 10 years but leave before reaching retirement age.
Source: Bellwether Education Partners, Teacher Retirement Systems: A Ranking of the States.

Sometimes states that don't participate in Social Security make up for it with more generous pension formulas. Connecticut and especially Massachusetts, for example, pay out generously to teachers who work for more than three decades.

So, critics of Bellwether's analysis might argue that a 10-year vesting period isn’t as big of a problem, because the goal is to entice people to teach for long careers, Rotherham says.

“Our response is, actually, you should want people to teach, and be able to teach for as long as they want to teach in a particular place,” he says.

Aside from long vesting periods and the lack of an alternative income stream in retirement, several states toward the bottom also have comparatively high debt obligations and low overall funding, including Colorado (No. 45), Pennsylvania (No. 47), and New Jersey (No. 50). Those states have promised benefits to current and retired teachers that total more than what the states have currently paid into the system.

One of the challenges of ranking state retirement plans, says Jean-Pierre Aubry, director of state and local research at the Center for Retirement Research at Boston College, is that what qualifies as 'good' will depend in part on the goal of the plan.

Overall, Aubry called Bellwether's analysis thorough and well-documented, but he worried that it was "missing the forest for the trees."

The authors considered so much minutiae about the plan designs to be able rank the states, he said. But that's not necessarily what policymakers or teachers themselves focus on, he says. The big questions — What does the benefit pay in retirement? What does it offer to people who switch careers before full retirement? And how is the cost split between the employer and employee? — get somewhat lost.

Other research finds pensions work well for teachers

Bellwether, which has published many reports with the goal of pushing conversations about ways to reform teacher pensions, has faced criticism for being anti-pension.

Other research from retirement security experts has found that most teachers do, in fact, benefit from pensions. One study that looked at women's retirement security found that among women age 65 and over, those who had worked as teachers were the best off in terms of retirement income.

A more recent study of six states' retirement plans estimated 77% of teachers in those states can expect to collect pension benefits that are greater in value than what they could receive under a model 401(k)-type plan. A separate look at teachers in California found similar results.

Nari Rhee, director of the retirement security program at the UC Berkeley Labor Center and one of the authors of the analysis of state plans, thought Bellwether’s approach of identifying relevant factors for different stakeholders was sound. And she listed a similar set of priorities when asked to define a quality pension plan for teachers: a vesting period of no more than five years, a cost-of-living adjustment to payments after retirement, a funding policy that requires the state to make the recommended contributions into the system.

But Rhee, who reviewed a copy of the rankings ahead of their release, said it was difficult to compare defined contribution and hybrid plans alongside pension plans without calculating the likely salary replacement rates under all three plans.

For pension plans, Bellwether’s authors calculated how much of a teacher’s salary would be replaced via pension payouts after retirement, based on the state's formula. But for the other plans, they considered the plans adequate if the combined annual contribution rate from the teacher and the employer was high enough to meet financial advisors' annual savings recommendation for retirement. They did not make assumptions about annual investment returns in those plans.

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Most plans reward long-tenured teachers over short-term (or transient) educators

Still, the biggest difference between Bellwether’s stance and other retirement experts’ work often comes down to who counts as a teacher for the purpose of the analysis.

One of the fundamental beliefs underlying Bellwether’s analysis is that teacher pension plans serve some teachers very well, but they don’t serve most teachers well. In particular, they reward long-serving teachers who stay in the same state. But they don’t offer as much to people who teach for shorter timelines or people who teach for a long time but move across state lines, like, for instance, the spouses of people in the military.

Yet that's by design, say officials with the National Association of State Retirement Administrators. Retirement benefits for teachers favor longer-term employees as an incentive for teachers to remain in the profession, so school districts can retain experienced teachers and provide a return to students and taxpayers on the investment the public has made in their career, Keith Brainard, research director of the association, wrote in comments about the report.

Bellwether’s authors consider anyone who enters teaching in their analysis of who will and will not benefit from state retirement plans. Other researchers focus on the fact that teachers who do stay past the first few years tend make long careers out of it. They argue that those short-term teachers shouldn’t count the same as career teachers.

“It’s a bit like the U.S. Senate giving disproportionate power to the least populous states and grossly under-representing large states,” Rhee says. “This systematically skews the results.”

If pension plans are designed to reward long careers, then many are working well. Even Bellwether’s analysis that focused specifically on long-term teachers shows more states performing well — five earned an A grade and seven earned a B; far more than the other profiles Bellwether considered.

But Rotherham and one of his co-authors, Max Marchitello, say that they aren't arguing that all teachers should be treated the same regardless of their years of service, but rather that retirement benefits should serve all teachers equitably. Many of these pension plans are 70-plus years old and haven't adapted to reflect current workforce trends.

"They're fundamentally designed for a labor force that has changed rather dramatically," Marchitello says.

Rotherham says he hopes the rankings can spark a conversation about what makes a pension sound for all teachers and for taxpayers.

“What does make a good plan? That’s a good thing to debate,” he says. “Debate is healthy because it will draw attention to the shortcomings here.”

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