Teacher Retirement System Demands Reform

As first appearing in the Columbia Tribune:

If the lovable bear Winnie the Pooh has a downside, it is his insatiable desire for the sweet taste of honey. Time and again, his uncontrollable urge has ended with him getting his head stuck in the honey pot and needing to be bailed out by his friends. In many ways, Missouri lawmakers have encouraged the same kind of foolishness, continually sweetening the pension pot for public school teachers. If they do not change course — and soon — they will put future lawmakers into an impossible situation where they are forced to call on their friends — the taxpayers — for a major bailout.

Sweetening the pension honey pot for public employees is a very tempting proposition. Indeed, for lawmakers, there is almost no down side because pension promises often are not realized for many years. By improving pension benefits, politicians can please many voters with promises that they do not have to keep. These pension enhancements, however, are not free.

In a new Show-Me Institute case study, Robert Costrell, professor of education reform and economics at the University of Arkansas, detailed the impact of pension enhancements to Missouri’s largest pension system, the Public School Retirement System (PSRS). “Missouri repeatedly and considerably enhanced its pension benefit formula from 1975 to 2001, resulting in large increases in pension wealth, particularly for those retiring in their 50s with 25-30 years of service,” Costrell wrote.

Three essential numbers are used to calculate a teacher’s pension payment from PSRS: years of service, final average salary and a multiplier that allows PSRS to calculate reduced early retirement benefits. Lawmakers can sweeten the pension pot by inflating final average salary calculations, increasing the multiplier or allowing individuals to retire earlier without penalty. Over the past few decades, Missouri lawmakers have employed each of these tactics.

Costrell noted that in 1977, a teacher could retire with his or her full benefits at 55 with 30 years of service. In 1986, the benefit multiplier was increased from 2 percent to 2.1 percent; in 1991, full benefits were granted with 25 years of service; in 1994, the multiplier increased to 2.3 percent; in 1996, lawmakers added insurance benefits into the final average salary calculations; in 1998, they increased the multiplier to the current 2.5 percent; in 1999, they instituted a “Rule of 80,” which allows a teacher to retire with full benefits when his or her age plus experience equals 80. That same year, lawmakers reduced the years used for the final average salary calculation from five to three, a move that increased the final average salary of all retirees.

With all of these enhancements, a teacher in Jefferson City can now retire in his or her early 50s after 30 years in the classroom with a pension that is approximately the equivalent of a lump sum payment of $950,000. That is, the “cash value” of the pension at the time of retirement is close to $1 million.

To keep pace with the pension enhancements, the contribution rate for teachers and their public school employers has increased dramatically from a combined 16 percent in 1975 to 29 percent today. Even with these increases, PSRS has not been able to keep pace with the promised benefits. If we assume a 4 percent return on investment, PSRS has more than $31 billion in unfunded liabilities.

If they are as simple-minded as ol’ Pooh, policymakers might think they are helping create a secure retirement system for teachers when they enact these pension enhancements. But they are really making promises that they (or future lawmakers) cannot keep. If they want to create a secure retirement system for current and future public school teachers, they do not need further enhancements; rather, they should enact fundamental pension reform.

James V. Shuls, Ph.D., is the director of education policy at the Show-Me Institute, which promotes market solutions for Missouri public policy.