The writer, of Fairfax, Va., is an Iowa native and alumnus of the University of Iowa. He is a policy analyst for Bellweather Education, a nonprofit research group focusing on education issues.
If the economic downturn due to COVID-19 is anything like the last one in 2008, that means bad news for Nebraska’s teacher pension plan.
During the last recession, the teacher plan’s unfunded liabilities tripled, from about $720 million to nearly $2.3 billion. In response, the state raised contribution rates and cut benefits for new workers. Those changes, in addition to an economic recovery, have helped the plan recover somewhat, although its unfunded liabilities still sit at $1.3 billion.
In the wake of COVID-19, Nebraska leaders will have two options for the state teacher pension plan. They could impose another round of contribution increases and benefit cuts on top of the ones already in place. Or they could learn from a model the state has been using for state employees since 2003.
The first option is unpleasant but straightforward. It would mean more pain for Nebraska’s teachers, via cuts in their take-home pay, less money for districts, and worse retirement benefits for the next generation of teachers.
The second option should be more appealing. In 2003, Nebraska began enrolling newly hired state employees into a different type of pension plan called a “cash balance” plan. Rather than basing retirement benefits off of formulas tied to their years of service, cash balance plans provide workers with individual accounts like a 401k but guarantee workers a positive rate of return.
A cash balance plan would benefit Nebraska’s teachers as well, because they balance risks between employees and employers, help prevent the build-up of additional unfunded liabilities, and provide a more portable benefit than what’s currently offered.
It might be useful to contrast the retirement benefits Nebraska provides its school employees and its state employees.
Teachers must serve for at least five years before qualifying for a pension, called the “vesting” period. Those hired post-2018 are placed in what’s called Tier Four. They must contribute 9.78% of their salary and are eligible to retire at age 65, or as early as age 60 if the sum of their age and years of service is more than 85. At that point, they qualify for a lifetime pension benefit worth 2% times their years of service times the average of their five highest years of salary.
That may sound pretty good, but due to high early-career turnover rates, only about one-third of new Nebraska educators will qualify for any pension at all, and only about one in eight will leave with a pension benefit worth more than their own contributions plus interest.
Under the teacher plan, the state and its school districts are contributing 11.88% of each worker’s salary. But due to the plan’s unfunded liabilities, only 30% of that employer contribution (equivalent to 3.6% of salary) is going toward actual benefits earned by employees. The rest, about 8.3% of salary, is going toward the plan’s unfunded liabilities. That money could be going toward salaries or other school services but is instead being siphoned off to pay for the unfunded pension debts.
If the past is any guide, Nebraska will now need to raise teacher contribution rates, cut teacher retirement benefits, or both.
In contrast, the cash balance plan for Nebraska state employees is currently operating a surplus and has maintained a funding ratio of 90% or more every year since it opened. Rather than conferring benefits via a formula, it guarantees workers a 5% return on their investments every year, plus additional interest credits and dividends when investment returns are strong.
Employees contribute 4.8% of salary, and after vesting at three years, they qualify for an employer match equal to 7.49% of their salary. Any time after reaching age 55, plan members can collect a monthly annuity on their balance, just like a pension, or take their money as a lump-sum payment.
During the current market downturn, Nebraska’s cash balance plan won’t be paying any extra dividends, but it will continue crediting state employees with the same 5% investment return guarantee.
In short, Nebraska is offering its state employees a better deal than it offers its public school teachers. Compared to teachers, state employees qualify for retirement benefits sooner, receive a higher employer contribution toward those benefits, and are better shielded from market downturns.
Rather than continuing to cut teacher benefits, Nebraska legislators should take this opportunity to extend its existing cash balance plan to teachers, and teachers should take this opportunity to demand better for themselves.