Robbing Peter To Pay Paul’s Defined Benefit Pension
After graduating from college, Peter and Paul began teaching in different Missouri public school districts. Feeling satisfied with their long, successful careers, they both retired after 30 years in the classroom. Little did the men know that for nearly three decades, the defined benefit pension system had been robbing Peter to pay for Paul’s retirement.
Though this story is fictional, the situation is a reality for many teachers in Missouri. Take, for example, the actual salary schedules of two public school districts, Jefferson City and Hickman Mills. Teachers in Jefferson City (Peter) start at a slightly higher salary than teachers in Hickman Mills (Paul), and they continue to earn a higher salary for 23 years. However, toward the end of their careers, Hickman Mills teachers receive larger pay raises and surpass their Jefferson City counterparts.
Over the course of a 30-year career, a teacher in Jefferson City will earn $29,213 more than a Hickman Mills teacher. Each of these districts is part of the Public School Retirement System of Missouri (PSRS). This system requires 29 percent of a teacher’s salary to be contributed to the pension system, 14.5 percent each from the employee and the employer. Assuming a constant 29 percent contribution rate, a Jefferson City teacher will have $8,472 more deposited into the pension system than a Hickman Mills teacher.
Because he or she deposits more into the retirement system, it would make sense for the Jefferson City teacher to earn more in retirement; however, that is not the case. Pensions in the PSRS system are based on a teacher’s three highest consecutive salaries, usually his or her final three years. The spike at the end of their careers gives Hickman Mills teachers higher final average salaries, meaning they earn more in retirement than the Jefferson City teachers.
Despite paying $8,472 more into the pension system, the Jefferson City teacher will receive more than $55,080 less than the Hickman Mills retiree over the course of a 30-year retirement.
This may sound unfair, but this is just the tip of the iceberg regarding problems with defined benefit pension systems. In an effort to boost their final average salaries, teachers and administrators regularly game these systems, switching positions near retirement. The result of the various forms of gaming is escalating payments by states or declining benefits for pensioners.
Missouri teachers and schools have seen an increase in their contribution rate eight times since 2004, rising steadily from 21 percent to the current 29 percent. Contribution rate increases are necessary to combat growing pension liabilities. In a recent report for the Show-Me Institute, the American Enterprise Institute’s Andrew Biggs noted that Missouri’s five largest public pension systems have unfunded liabilities of nearly $54 billion. PSRS accounts for more than $31 billion of those unfunded liabilities.
Each of the problems mentioned here stems from the fact that Missouri’s defined benefit pension systems do not tie an individual’s contributions directly to his or her pension benefits. That is why a teacher who has paid considerably less into the system can earn more in retirement.
Missouri and other states should act quickly to reform public employee pension systems. In a recent report from the Manhattan Institute, Josh McGee and Marcus Winters laid out a plan that would allow states to reign in unwieldy pension liabilities and make the system fairer for pensioners. This can be accomplished by abandoning our current defined benefit plans and replacing them with a system that allows pension wealth to accrue smoothly based on an individual’s contributions. McGee and Winters note that in many cases, this would allow states to raise teachers’ salaries considerably.
This type of reform would ensure that individuals who pay less into the system do not get larger benefits than those who pay more. It would also make pensions portable. This would be attractive to individuals who would like to teach, but are unsure of making it a career.
Our current defined benefit pension system for Missouri teachers is unfair and unsustainable. It’s time to stop robbing Peter to pay Paul’s pension. It’s time to fix our pension problems.