Chad Aldeman February 15, 2017

Myths and Realities About Iowa’s Teacher Pension Plan

There are at least three myths surrounding teacher pension plans.

• Myth 1: Traditional pension plans take all the risk on behalf of teachers.

• Myth 2: Traditional pension plans help retain teachers.

• Myth 3: Traditional pension plans offer better benefits than alternative models.

A quick note on assumptions and data sources

• Throughout my presentation, I’ll be looking at pension wealth accrual and retention rates for new, 25-year-old female teachers.

• Data on plan specifics and assumed turnover rates come from IPERS’ FY2016 Comprehensive Annual Financial Report, available at: https://www.ipers.org/about-us/publications.

Myth 1: Traditional pension plans take all the risk on behalf of

teachers.

Due to a back-loaded benefit structure, Iowa teachers suffer from attrition risk, the risk that they might leave.

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$0

$200,000

$400,000

$600,000

$800,000Iowa Teacher Retirement Wealth, By Age

Total Retirement WealthAge

Very little retire-ment savings for early- and mid-ca-reer teachers

Pension wealth spikes

Pension wealth de-clines

Most Iowa teachers do not stay long enough to qualify for the large back-end benefits. They’re losing out.

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$0

$200,000

$400,000

$600,000

$800,000

0%

20%

40%

60%

80%

100%Comparing Pension Wealth Versus Retention

Rates

Total Retirement Wealth Cumulative Teacher Retention

Age

Myth 2: Traditional pension plans help retain teachers.

If Iowa teachers valued a pension, they should change their behavior to qualify for one (at 7 years). But they don’t.

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Iowa's Withdrawal RateIowa's Withdrawal Rate If Vesting Mattered (Hypothetical)

Years of Experience

Ann

ual T

runo

ver R

ate

(%)

In contrast, Iowa’s pension plan pushes out teachers at much higher rates, starting at the early retirement age of 55.

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Years of Experience

Cum

ulat

ive

Ann

ual T

runo

ver R

ate

(%)

On a cumulative basis, half of Iowa’s teachers leave before 5 years, and only 1 percent make it 40 years.

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Years of Experience

Cum

ulat

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Ret

entio

n R

ate

(%)

Myth 3: Traditional pension plans offer better benefits than alternative

models.

Most Iowa teachers would be better off in a more portable retirement plan like a cash balance plan...

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$0

$200,000

$400,000

$600,000

$800,000Comparing Iowa’s Existing Defined Benefit (DB) Plan Versus A Cost-Neutral Cash Balance Plan

Existing DB Plan Cash Balance PlanAge

Existing DB plan fi-nally worth more after 23 years

…Or even a defined contribution plan…

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$0

$200,000

$400,000

$600,000

$800,000Comparing Iowa’s Existing Defined Benefit (DB) Plan Versus A Cost-Neutral Defined Contribution

(DC) Plan

Existing DB Plan DC PlanAge

Existing DB plan finally worth more after 26 years

…Let alone the defined contribution offered to state university employees (TIAA plan)

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$0

$200,000

$400,000

$600,000

$800,000

$1,000,000Comparing Iowa’s Existing Defined Benefit (DB)

Plan Versus TIAA DC Plan

Existing DB Plan TIAA PlanAge

Existing DB plan finally worth more after 31 years

Key lessons for Iowa

• Retirement plans are for workers, not employers. Iowa’s main goal should be providing a path to a secure retirement to all of its workers, no matter how long they choose to stay.

• Given rapid turnover rates, most teachers would be better off in a more portable plan.

• There are multiple options for Iowa to provide a simple, low-cost, financially sustainable retirement plan for all teachers.

For more information, visit:

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