It has been said that John F. Kennedy’s 1961 inaugural address inspired a
generation to consider public service. But for those going into public service
today, Kennedy’s words might be rephrased: “Ask not what your country can
do for you, ask what you can do for your country — and be sure to ask about
the pension benefits.”
That’s because, in the decades since Kennedy, the public and private sectors
in the U.S. have taken separate paths when it comes to retirement benefits.
Most public sector employees enjoy defined benefit plans – retirement
packages that provide a guaranteed benefit at retirement. This model has
fallen by the wayside in the private sector due to the risks and costs such an
approach imposes on employers. Today, four out of five public sector workers
enjoy defined benefit pensions; fewer than one out of five private sector
workers do. While most in the private sector receive some form of retirement
benefit (usually through a defined contribution plan, which provides
payments into an investment account but no guarantees as to ultimate
benefit levels), one-third of private sector workers have no access to an
employer-sponsored retirement at all.
In short, retirement benefits are potentially a major advantage to working in
the public sector. They also usually represent a massive investment in
deferred compensation — with funds that might otherwise be used for
salaries.
In recent months, Utah Foundation released two reports on teacher pay and
retirement: “Apples to Apples? How Teacher Pay in Utah Stacks Up to the
Competition” and “Another Bite at the Apple: Comparing Teacher Retirement
Plans.” The reports find that teacher pay in Utah is low compared to the
private sector and, when adjusted for experience and credentials, in the
middle of the pack for teachers in the Mountain States. But they also point
out the necessity of looking at teacher compensation as a whole, rather than
just pay in isolation.
To be sure, the retirement portion of teacher compensation is significant.
Utah school districts contribute 20% of payroll toward teacher retirement
costs. While that might sound like a potentially rich benefit for teachers, half
of that amount goes toward paying down the unfunded liabilities incurred by
the pension system in the past. This unfortunate situation is precisely why
private sector employers have abandoned the defined benefit model. But
Utah should take heart: The underfunding situation is far worse in other
states.
To reduce risk and future costs, Utah in 2011 undertook an overhaul of the
Utah Retirement System, in which teachers participate. Teachers hired after
that time no longer have access to a standard defined benefit plan. Rather,
they must choose between a defined benefit plan with a small defined
contribution component (called a hybrid plan) and a defined contribution
plan akin to the private sector model.
This makes Utah’s teacher retirement offerings different from the other seven
Mountain States, all of which continue to offer a standard defined benefit
plan. And, at retirement, the benefits may be lower in Utah than in the other
Mountain States.
But Utah teachers enjoy a major benefit on the front end: They are currently
not required to contribute to their retirement. By contrast, the plans in the
other seven states require teachers to provide 7% to 15% of their salaries to
support the pension fund. Furthermore, Utah teachers can breathe easier
than most about the security of their retirements. Of the eight Mountain
States, only Idaho has a better-funded retirement system than Utah – and
Utah’s level of funding is based on relatively conservative investment
assumptions.
All of this suggests that policymakers looking to attract and retain teachers
might consider shouting from the rooftops to prospective teachers about how
much better Utah’s retirement benefits are compared to private sector jobs
and, in terms of the cost to the employee, other states. Or they might explore
options for recalibrating the total compensation picture to ensure that it is
more competitive, including the potential for reducing retirement benefits in
favor of higher pay. Other states, swimming in unfunded pension obligations,
would probably envy such choices.