What’s Wrong With N.J.’s Teacher Pension System? Ask Your Nearest Millennial

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A new teacher’s pension is supposed to be a perk. The truth is that for the majority of the nation’s new teachers, what they can anticipate in retirement benefits will be worth less than what they contributed to the system while they were in the classroom, even if they stay for decades.

That’s from Fordham Foundation’s new analysis, “(No) Money in the Bank,” which grimly casts a spotlight on Newark Teacher Union’s  pension system. It’s important to note that NTU’s fiscal distress closely mirrors NJEA affiliates, who comprise almost all the rest of N.J. school districts. Despite empty promises by glad-handers like prematurely-anointed Governor Phil Murphy and theatrics from NJEA, anyone who can do math must come to the conclusion that N.J.’s teacher delayed compensation system is nothing more than smoke and mirrors.  No constitutional amendment, no millionaire’s tax, no surge of economic growth and return on investments, no tax incentive, can salvage a state pension system that has $95 billion in liabilities and another $65 billion in retirees’ health-care obligations. (Remember that our annual state budget is about $35 billion.)

And, as long as we’re on the topic of education costs, fully funding our state’s school funding formula (SFRA), another empty promise of Phil Murphy’s, would costs an additional $2 billion per year.

It’s unfair. Teachers accept lower salaries for great benefits, including deferred compensation in the form of pension payments. Yet the pension fund will be drained dry in eight years.

The only salvation is meaningful pension reform which would require a major revamping of the way we pay teachers — converting deferred compensation to real-time compensation; allowing districts to pay teachers more for hard-to-find specialities like science and special education and less for dime-a-dozen specialities like elementary ed and gym; moving from defined benefits to defined contributions like 401K plans. But try inserting reality into NJEA/Phil Murphy pipedreams. Senate President and erstwhile gubernatorial front-runner Steve Sweeney tried and looked what happened to him.

Here’s an excerpt from Fordham’s analysis of Newark Teacher Union’s pension system in which teachers don’t actually receive more that they put in until they have completed 18 years of service. Fordham call that point the “crossover.”

A Newark teacher who leaves after five years of service (or at any point before the vesting point of 10 years) is not eligible to receive pension benefits at all, because she has not vested.. Her pension wealth is zero, and at five years she has contributed $18,893 into the retirement system. 

If she leaves the system with at least 10 years of service, she has now vested and is eligible to start receiving pension benefits once she reaches age 65. Say she separates from the system after 15 years—the average experience of a teacher who leaves the profession.7 Her pension wealth is $65,606, but at this point she has contributed a total of $84,310. Not only has she not yet reached the crossover point, but her pension benefit is worth approximately $19,000 less than her cumulative contributions. 

 After 18 years, a Newark teacher finally reaches the crossover point—meaning her benefits are worth more than her contributions. At that point, she will have contributed a total of $116,767 into the system and can expect lifetime pension wealth accrual worth $117,808. Her net benefit becomes positive, though small ($1,041). 

A 25-year career is longer than most teachers’ careers—fewer than one out of four teachers nationwide stays more than 20 years.8 After 25 years, a Newark teacher’s net benefit is a modest $42,423. (Said another way, the red and green lines in Figure 1 remain close together even after the crossover point.)

The bottom line, says Fordham analysts, is that teachers who begin teaching in Newark Public Schools at age 25 must wait “18 years to reach the crossover point. Teachers who exit the New Jersey retirement system early are financially disadvantaged compared to teachers who remain teaching under the same system much longer—in this case, at least 18 years.”

Tell that to mobile  millennials, who will have 15-20 jobs over their lifetimes. If we want to make teaching an attractive career choice for the new generation, we could start by getting rid of old-school pension systems.

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  • StateAidGuy, January 28, 2017 @ 2:33 am Reply

    You have a ton of interesting material in this.

    It surprises me how rarely anyone talks about how teachers unions rip off their younger and short-career members.

    The problem isn't just pensions, it's how dues are collected. The NEA state dues are $866 per full-time teacher, regardless of salary.

    So a teacher making $100k pays $866. A new teacher making $50k pays $866.

    It's a more regressive tax system than any state has.

    The NJEA wants a steeply progressive income tax structure and constantly says that “millionaires need to pay their fair share,” but it ignores that principle of progressively when it actually does have controls revenue from itself.

  • kallikak, January 28, 2017 @ 4:41 pm Reply

    Your comparison of NJEA dues to a regressive tax is misplaced.

    Every starting teacher in an NJEA bargaining unit is guaranteed the run of a multi-column salary guide that rewards longevity and course credits/degrees. Because future contracts are built upon current ones, they only get richer over time.

    Most importantly, the largest bumps in most salary guides occur for relatively young teachers (8-12 years experience) so that real veterans (20+ years) typically receive the apportioned remainders of contract settlements.

    Given that skewing, there is an argument that younger teachers should pay relatively more because they get relatively more—not to mention entree into a licensed and protected class.

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