Study: 401(k)-style retirement systems discourage teachers to stay in profession
02/12/2016

 

A new study found that defined benefit pensions are best for teachers. According to the University of California, Berkeley study, “switching to an account-based retirement system – such as a 401(k) or cash balance plan – would sharply reduce the retirement income security of teachers who account for a majority of the educational workforce in California.”

 

Many states, including Indiana, are struggling to retain good teachers who are leaving the profession early. The study’s lead author, Nari Rhee, addresses the issue of retaining teachers through offering a defined benefit program.

 

“The security of a defined benefit plan encourages teachers to stay in the profession despite relatively low salary levels for a degreed career,” said Rhee. “Yet it has the additional effect of encouraging retirement among older teachers to allow for new ones to enter the field.”

The study is available online.

 

These findings come at a time when legislators are considering HB 1004, which would create a new 401(k)-style defined contribution teacher retirement program as an alternative to the existing defined benefit pension/annuity plan.

 

Besides the risk to teachers and potential damage to students, a new defined contribution plan will cost about $1 million in upfront costs incurred by the state’s pension fund, Indiana Public Retirement System, and could cost employers—our local school districts –even more as they try to fund the existing defined benefit retirement plan.

 

Furthermore, if the school’s contribution rate rises, that leaves fewer dollars to pay teachers’ salaries. Less funding results in suppressed career salary earnings, which directly impacts a teacher’s pension, because one’s pension is partly determined by one’s highest five years of salary.

 

ISTA will continue to oppose any efforts to transition Indiana’s current hybrid defined benefit/annuity retirement benefit for teachers to a 401(k)-style defined contribution plan. Efforts to do so are misguided and will exacerbate, not solve, Indiana’s teacher shortage.