How Not to Reform Teacher Pensions
West Virginia's experience offers lessons in what states can do to provide retirement systems that benefit educators and taxpayers alike.
Nationally, increases in teachers' pension and post-retirement health care costs are outpacing growth in overall spending for K-12 education. Pensions are driving most of the problem. Many state leaders know this, but they aren't always willing to do the difficult work of reforming their teacher retirement systems. And they've been unnecessarily scared by critics who insist that moving away from a traditional defined-benefit pension system is a disaster for teachers.
Those skeptical of pension reform often point to Alaska, Michigan and West Virginia as case studies in the failures of changing existing defined-benefit pensions. (When Kentucky and Missouri recently began talking about reform, for example, West Virginia's experience was immediately brought up as a cautionary tale.) But these three states offer concrete lessons about how to approach pension reform responsibly, and to the benefit of both teachers and taxpayers. Legislators and governors who want to make a real, long-term difference on teacher compensation should take heed, giving particular attention to what happened in West Virginia.
In the early 1990s, faced with mounting cost pressures, West Virginia's legislature closed its traditional defined-benefit teacher pension plan to new members. In its place, the state enrolled new teachers in a 401(k)-style defined-contribution (DC) plan. But the larger debt issues never went away, and in 2005 the state reopened its defined-benefit pension plan.
But a closer look at West Virginia's teacher pensions reveals that the limited success of the state's DC plan wasn't the result of an innate shortcoming of DC plans in general. Rather, the state's design choices undermined the ability of the plan to provide a sufficient benefit to most teachers. Indeed, both plans were designed in such a way that at least 40 percent of teachers never qualified for any retirement benefits from the state at all.
But where West Virginia really went wrong was switching to a DC plan without also implementing an actionable and accountable plan to pay down the state's existing pension obligations to current and retired teachers. As a result, while the DC plan was in place, the state's teacher-pension debt grew from $3.5 billion to $5 billion. To try to cover those costs, the state currently spends fully 25 percent of its overall K-12 education budget on benefits. That's among the highest rates in the country.
The real lesson for policymakers? To effectively reform teacher pension systems, states should require the fewest years of service possible before a teacher vests into the system and becomes eligible for state benefits. Moreover, to produce a sufficient benefit, teachers and the state combined should contribute between 10 and 15 percent of salary annually. Finally, it is critical that states have a plan to pay down existing pension debt.
Many states are in worse shape than West Virginia. Across the country, states carry roughly $500 billion in unfunded teacher pension liabilities. To try to get those debts under control, states have cut benefits, increased how much teachers must pay into the system, and increased their own contributions, often by shifting other education funds into pensions. In some states, the situation is so dire that those states have pursued all three efforts at the same time.
Despite the popular narrative that West Virginia's teacher pension reform was an abject failure, it is critical that reformers not fall prey to misunderstandings of West Virginia's story. The state's story should be leveraged to encourage, rather than stymie, important policy change and construct sustainable teacher retirement systems that serve both educators and taxpayers. Otherwise, teachers' retirement benefits will eat up more and more of K-12 education spending and further squeeze state budgets.