The 2008-2009 recession marked a turning point for many aspects of the American economy, and public sector pensions were no exception. For new teachers, particularly in California, the changes in pension offerings have been significant and not necessarily for the better. According to a study by Equable, a bipartisan nonprofit focused on public pension education and solutions, California's overall pension quality for new teachers has dropped to a state ranking of #30. This decline highlights a broader national trend that makes it imperative for new teachers to plan for supplemental retirement savings.

The Decline in Pension Value

Retirement benefits are a powerful form of deferred compensation, but navigating them across states can be a complex undertaking. The Great Recession was a wake-up call, prompting many states to reassess and, in many cases, recalibrate the pension benefits offered to new hires to better manage financial risks and liabilities. Unlike straightforward comparisons of salaries or health insurance benefits, evaluating pension plans requires understanding the nuances of different structures and their long-term impacts. States like California may offer a single retirement plan—whether a defined benefit (pension) plan, a defined contribution plan (like a 403(b)), or a “hybrid” plan. Meanwhile, others like Michigan, Pennsylvania, and South Carolina empower new teachers with choices of different plans. 

The Equable study notes, however, that the value of pension benefits today is approximately $100,000 less than it was in 2005, representing a 13% decline over the past two decades. This reduction is primarily felt by new teachers entering the workforce, as those hired before the creation of new, lower-value benefit tiers still receive the benefits they were initially promised.

Understanding the Impact on New Teachers

For new and prospective K-12 teachers, factors such as salary, location, and health insurance are typically top of mind. However, the quality of retirement benefits is equally important. The reduction in pension benefits means that new teachers need to be more proactive in planning for their financial future. With traditional pension plans offering less value, exploring supplemental retirement savings options is crucial.

Supplemental Retirement Savings Options

To offset the reductions in defined benefit pension programs, new teachers should consider alternative retirement savings plans:

1. Defined Contribution Plans (e.g., 403(b) plans): These plans are similar to 401(k) plans in the private sector, allowing teachers to contribute a portion of their salary to an investment account. The value of the account depends on contributions and investment performance, providing a potential for growth but also exposure to market risks.

2. Guaranteed Return Plans (Cash Balance Plans): These plans offer a fixed return on contributions, combining elements of traditional pensions and defined contribution plans. Examples include CDs and cash value insurance plans. They provide more predictable benefits while still offering growth potential.

3. Hybrid Plans: These plans blend features of defined benefit and defined contribution plans, offering a balance of predictable income and investment growth. They aim to provide a more stable retirement income while offering both the upside and downside investment risks associated with contribution plans.

The Role of State Legislation

The shift in pension benefits is largely a result of state legislation aimed at reducing costs and managing financial risks associated with unfunded liabilities, which have grown to over $600 billion nationwide. While these measures were necessary in the context of economic recession and financial volatility, they have placed a burden on new teachers, who must now navigate a more complex retirement landscape.

Planning for the Future

For new teachers, understanding the changing landscape of retirement benefits is crucial. The best states for new teachers are those that offer robust retirement plans without shifting undue financial burdens onto educators. However, regardless of the state, it is essential for new teachers to actively plan and save for retirement. By leveraging defined contribution plans, guaranteed return plans, and hybrid plans, teachers can build a more secure financial future despite the diminished value of traditional pension offerings.

Interest in the teaching profession has declined in recent years, particularly among people in their 20s. As the ‘23-’24 school year opened, there were an estimated 55,000 vacant teaching positions nationwide – an increase of almost 35% over the previous year. However, researchers have found that many characteristics valued by members of Gen Z—such as financial security, ongoing support, collaboration, and a sense of purpose—align well with careers in education. Additionally, Gen Z's greater racial and ethnic diversity presents a unique opportunity for the teaching profession to attract this new generation of talent.

School districts, as well as county and state agencies, need to address these severe shortages soon, and attract new talent from the ranks of Gen Z. This very unique generation is saving for retirement right out of the gate. Reflecting the angst felt by younger generations about Social Security and traditional pension plans, a recent Northwestern Mutual study found that, while the average American says they started saving for retirement at age 31, members of Gen Z started at 22 – almost a decade ahead of average and a full 15 years ahead of Baby Boomers. By offering greater flexibility with retirement plans, and by actively engaging faculty in retirement planning, educational agencies should be able to build on this to attract new teachers. 

As the teaching profession continues to evolve, so too must the approach to retirement planning. By staying informed and proactive, new teachers can ensure they are well-prepared for retirement, even in the face of reduced retirement benefits.