Consider two hypothetical teachers with nearly identical resumes:

• Ms. Early is 65 years old, and she taught for 20 years in our public schools. She began her career at age 25, but by 45 decided it was time to try something else. At the time she left teaching, her salary was \$33,086, the equivalent of \$50,000 today. She’s now ready to retire and, because she taught for 20 years, she’s eligible for a pension that will be paid out in monthly installments for the rest of her life. Her pension formula will be based on her years of experience (20) times a multiplier factor (2 percent) times her annual salary of \$33,086. Her pension will be worth \$13,234 a year.
• Like Ms. Early, Ms. Late is also 65 years old, and she also taught for 20 years in our public schools. But Ms. Late tried various other careers before trying her hand at teaching at age 45. Her salary this year, her last year of teaching, was \$50,000. She’s now ready to retire and, because she taught for 20 years, she’s eligible for a pension that will be paid out in monthly installments for the rest of her life. Her pension formula will be based on her years of experience (20) times a multiplier factor (2 percent) times her annual salary of \$50,000. Her pension today will be worth \$20,000 per year.

These two teachers are identical in all ways except for one critical difference: the age at which they began teaching. And yet, that difference will mean Ms. Late will qualify for a pension that’s 50 percent larger than Ms. Early’s. Over a full retirement–65-year-old women today are projected to live another 21.5 years, on average–Ms. Late will qualify for retirement benefits worth almost \$140,000 more (in today’s dollars) than Ms. Early.

The explanation here is pretty straightforward. In every state, a teacher’s pension amount is based on her final salary in the last year she worked, regardless of when that happened to be (Social Security, in contrast, automatically adjusts prior years’ earnings). This is a key reason why teacher pension plans are so back-loaded, and it means that pensions reward later-career service much more heavily than early-career service.

This situation becomes even more pronounced when looking at teachers with shorter careers. Instead of two hypothetical teachers, each working 20 years, imagine four teachers who each teach for 10 years. One teaches from age 25-35, a second from 35-45, a third from 45-55, and a fourth from age 55-65. All four teach the same number of years and earn equivalent salaries (in present dollars). But because of this timing issue, the fourth teacher would qualify for a pension worth more than twice what the first teacher would earn.

All of this creates some strange risks and rewards. Teachers who start at younger ages have the potential to earn much larger pensions by the time they retire, but, because they have more years to go, they’re also much less likely to make it that long. Younger teachers also face different calculations about what to do with their pension. For a 35-year-old leaving the profession, it may make sense to cash out a pension and roll it over into some interest-bearing savings. Otherwise, the money will just sit there and not earn interest. For someone closer to retirement, the pension may be a better deal. Teachers must know how pensions work in order to maximize their retirement saving in their unique situations.

From a public policy standpoint, it doesn’t make a whole lot of sense to prioritize one year of teaching over another. But that’s exactly what teacher pensions do.

Want to learn more? Check out this whole article and explainer video at TeacherPensions.org

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This article republishes “A Tale of Two Teachers: A Retirement Story” by Chad Aldeman, an article published at TeacherPensions.org in April 2016.