It has been said that John F. Kennedy’s 1961 inaugural address inspired a generation to consider public service. But for those going into public service today, Kennedy’s words might be rephrased: “Ask not what your country can do for you, ask what you can do for your country — and be sure to ask about the pension benefits.”
That's because, in the decades since Kennedy, the public and private sectors in the U.S. have taken separate paths when it comes to retirement benefits. Most public sector employees enjoy defined benefit plans – retirement packages that provide a guaranteed benefit at retirement. This model has fallen by the wayside in the private sector due to the risks and costs such an approach imposes on employers. Today, four out of five public sector workers enjoy defined benefit pensions; fewer than one out of five private sector workers do. While most in the private sector receive some form of retirement benefit (usually through a defined contribution plan, which provides payments into an investment account but no guarantees as to ultimate benefit levels), one-third of private sector workers have no access to an employer-sponsored retirement at all.
In short, retirement benefits are potentially a major advantage to working in the public sector. They also usually represent a massive investment in deferred compensation — with funds that might otherwise be used for salaries.
In recent months, Utah Foundation released two reports on teacher pay and retirement: "Apples to Apples? How Teacher Pay in Utah Stacks Up to the Competition" and "Another Bite at the Apple: Comparing Teacher Retirement Plans." The reports find that teacher pay in Utah is low compared to the private sector and, when adjusted for experience and credentials, in the middle of the pack for teachers in the Mountain States. But they also point out the necessity of looking at teacher compensation as a whole, rather than just pay in isolation.
To be sure, the retirement portion of teacher compensation is significant. Utah school districts contribute 20% of payroll toward teacher retirement costs. While that might sound like a potentially rich benefit for teachers, half of that amount goes toward paying down the unfunded liabilities incurred by the pension system in the past. This unfortunate situation is precisely why private sector employers have abandoned the defined benefit model. But Utah should take heart: The underfunding situation is far worse in other states.
To reduce risk and future costs, Utah in 2011 undertook an overhaul of the Utah Retirement System, in which teachers participate. Teachers hired after that time no longer have access to a standard defined benefit plan. Rather, they must choose between a defined benefit plan with a small defined contribution component (called a hybrid plan) and a defined contribution plan akin to the private sector model.
This makes Utah’s teacher retirement offerings different from the other seven Mountain States, all of which continue to offer a standard defined benefit plan. And, at retirement, the benefits may be lower in Utah than in the other Mountain States.
But Utah teachers enjoy a major benefit on the front end: They are currently not required to contribute to their retirement. By contrast, the plans in the other seven states require teachers to provide 7% to 15% of their salaries to support the pension fund. Furthermore, Utah teachers can breathe easier than most about the security of their retirements. Of the eight Mountain States, only Idaho has a better-funded retirement system than Utah – and Utah’s level of funding is based on relatively conservative investment assumptions.
All of this suggests that policymakers looking to attract and retain teachers might consider shouting from the rooftops to prospective teachers about how much better Utah’s retirement benefits are compared to private sector jobs and, in terms of the cost to the employee, other states. Or they might explore options for recalibrating the total compensation picture to ensure that it is more competitive, including the potential for reducing retirement benefits in favor of higher pay. Other states, swimming in unfunded pension obligations, would probably envy such choices.
Peter Reichard is president of Utah Foundation, a nonpartisan, nonprofit public policy research organization. Reach him at email@example.com. Find the recent reports on teacher pay and retirement at utahfoundation.org.