Comparison is the thief of joy.
attributed to Theodore Roosevelt
A topic that comes up reasonably frequently is the difference in teacher pension plans. Usually the context is someone complaining (suggesting?) that some other pension plan is “better” than theirs. It seems like a simple enough comparison, teachers are teachers and pensions are pensions, right? Well, no.
Sure, teachers everywhere are trying to help students learn, but the conditions under which they are doing it can vary dramatically, and that includes things like pay and benefits. In these United States the pay for (public school) teachers ranges from around $30,000 a year to over $130,000 a year (and benefits can vary widely as well).
And while defined benefit pensions have many things in common, the details can vary dramatically (and the details matter). And, not everyone has just a defined benefit pension. There are hybrid plans (combines a defined benefit and a defined contribution) and straight defined contribution plans, too.
To complicate matters, most teacher pension plans these days also have tiers of benefits, with teachers who started quite a while ago typically having better (often much better) benefits than newer teachers. Here are just a few of the “details” that matter when trying to make comparisons.
Social Security Supplement or Replacement?
In most pension plans, teachers pay into both Social Security and their pension plan, but in at least 15 pension plans teachers pay only into the plan and not into Social Security at all. Which means they won’t get a Social Security benefit at all (or, if they have enough Social Security-covered earnings outside of teaching to qualify for Social Security, their benefit will be reduced by the Windfall Elimination Provision). When comparing plans, it’s very important to know whether you are comparing a pension that is supposed to replace Social Security or one that’s just supposed to supplement it.
Teacher Pay
Most defined benefit plans calculate their benefit based on the teacher’s highest average salary. For most (career) teachers that happens at the very end of their career, but teacher salary schedules vary widely between states and even between districts within states. Some (career) teachers can expect to calculate their pension benefit with a highest average salary around $50,000 and others with a highest average salary of around $125,000. When comparing plans, it’s very important to know what a reasonable average salary might be to plug into the formula.
Highest Average Salary Calculation
Speaking of highest average salary. Not only do salaries vary tremendously, but how the highest average salary is calculated can vary as well, both by pension plan and by tier within the pension plan. For some folks, it’s their three highest years, no matter when those years occurred in their career. For others, it’s five. For some folks, those years have to be consecutive years. For some it’s as many as 8 years and they have to be within their last 10 years. And different things get included in the salary that gets counted for that. In some plans, it’s only your base salary. In others, it’s any pay whatsoever you receive (including coaching, sponsoring activities, working events, etc.) In Missouri, even the amount your employer pays toward your insurance benefits is included. Again, details matter when trying to compare.
Employee Contribution Amount
Most folks don’t realize that every pension plan has a different employee contribution amount, and that sometimes even within a plan the amount varies based on tier. For example in some tiers in New York (both NYC and NYS, separate pension plans), employees contribute 3% of salary, but for only the first 10 years! (They do contribute 6.2% to Social Security for the duration.) But in Missouri, they currently contribute 14.5% throughout their entire careers (but don’t contribute to Social Security). In Colorado, everyone currently contributes 11%, but only the very newest teachers have to make pension contributions on Section 125 contributions (pre-tax insurance premiums, FSAs, Dependent Care Spending Accounts, etc.), which is a huge benefit for older teachers. (Saves them 11% on all of their Section 125 contributions thoughout their career, then they drop pre-tax contributions during their HAS years.) Sometimes one benefit will look much better than another, but you then need to realize that they may have contributed twice as much (or more) over the years.
Oh, and what about employers? Some employers provide a match for contributions to a 403b plan, which should get factored in as well. Some employers pay for some or all of their employee’s contribution (Illinois, Indiana, Wyoming). And some employers put more toward salary and less toward benefits, some do the opposite. It’s a very complicated calculation if you’re trying to compare.
Tiers (or sometimes Tears)
Most pension plans have multiple tiers these days where, depending on your membership date, you get a different level of benefit (not all pension plans call them tiers). When comparing, you have to make sure you are comparing the benefit in your plan with the equivalent benefit in another plan for someone hired at the same time as you. And, sometimes, just a difference of a year or two makes a huge difference in the level of benefits (and that’s just luck of the draw of when the new tier was implemented in each plan). In addition, plans have made these benefit adjustments to address their funded status, and different plans have done that in different ways. Some plans have done that by reducing benefits for newer hires by a lot, and others by spreading it out over everyone more equally. Depending on which way they decided to go, that could have a huge impact on your specific benefit.
COLA
Once you retire, your initial benefit is determined by a formula, but what happens after that varies tremendously. In some plans, that’s it, that’s the amount you get forever – you never get an increase. In others, you get a cost-of-living adjustment each year (or at least each year after you reach a certain age), but the amount of that adjustment varies widely (and since most of those compound, small differences can really add up over time). And, of course, folks in Social Security states are going to get a second pension starting somewhere between age 62 and 70 (and that one definitely has a COLA associated with it). Some plans can “afford” to give you a higher initial benefit compared to another plan because they aren’t going to ever increase that benefit, whereas the “lower” benefit may turn out better over time because it has a COLA.
Percent for Years of Service and Maximums
Every plan has a different formula, and a key piece is what percent of your highest average salary you get for each year of service credit. But those are not straightforward at all. Some plans have a fixed percent for every year, others have a scale that changes based on both your tier and how many years of service credit you retire with. New Jersey doesn’t do a percent-per-year, but instead divides your years of service by 55 or 60 (depending on tier). And some states have a maximum you can earn (Iowa is 65%), whereas others you can earn all the way up to 100%.
Health Insurance
Some pension plans provide low-cost or at least subsidized health insurance after you retire, others don’t. If you just compare pension amounts, you might be missing a big piece of the benefit someone might be getting.
Taxes
Some states don’t tax retirement income at all, others partially exclude it, and still others tax the entire thing. Of course, you may move to a different state in retirement, which would then change that calculation for you.
Age at Which You Retire and Early Retirement Reductions
Each plan has a different combination of age and years of service that determine when you are eligible to retire with a full or reduced benefit (and often those vary by tier within a given pension plan). Again, plans have made trade-offs here that are not always easily seen when doing a quick comparison between plans. Plans also use very different reduction factors for early retirement, so while two plans may both let a teacher retire early at age 55 (as an example), in one plan it might be a 20% reduction and in another it might be 75%. Details, details, details.
Okay, I could go on and on (and on), but I think that gives you a pretty good idea of just some of the factors that make it really complicated to try to compare pension plans. Below I’m going to link to some google docs that try – at a high level – to give you an idea of the variety of factors that you have to consider when comparing plans. And, to be perfectly clear, these are not all the factors nor all the nuances, but hopefully they will give you some idea of the complexity. The following includes the 18 pension plans I’ve written books for, plus the two that are in draft form. Even if you just limit this to the United States, that’s well less than half the teacher pension plans (many states have multiple plans, like New York State and New York City, Illinois and Chicago, Minnesota and St. Paul, etc.)
Teacher Pension Plan: Overall Comparison
Teacher Pension Plan: 2022 Hire Comparison
Teacher Pension Plan: 2012 Hire Comparison
Teacher Pension Plan: 2002 Hire Comparison
So, next time you are tempted to compare different pension plans, stop for a moment and realize that unless you have spent at least a couple of hours diving into each of the plans that you are comparing, you may be missing something important. And, in the end, it doesn’t really matter “whose is better”, what matters is making the most of the one you have, and optimizing it the best you can in a way that aligns with your values and helps you achieve your goals.
Fisch Financial 