The Best U.S. States for New Teacher Retirement Benefits

There are lots of factors that new, prospective K–12 teachers have to consider when entering the education workforce. People typically pay the most attention to things like salary, location, and health insurance benefits, but what U.S. States are the best for new teachers looking for secure retirement?

Retirement benefits are a unique form of compensation in that they are deferred compensation. It is straightforward to compare the salaries offered to teach in one county versus another, or even to look at the health insurance benefits (medical plus dental? plus vision?) offered by one school district versus another. But comparing retirement plans on a state-by-state basis is a more difficult because there is no intuitive way to understand the value of one pension plan versus another, or whether a hybrid plan or defined contribution (DC) plan might be more valuable.

This article provides a ranking of states based on the quality of retirement benefits that they offer to new teachers entering the workforce in 2022-23, first published in Special Report #3 of the Retirement Security Report Teacher Edition.

 

Jump to the Complete Rankings

The Top 10 / Bottom 10 States by Average Quality of Retirement Benefits for New Teachers

  1. South Carolina (94.2%)
  2. Tennessee (88.2%)
  3. South Dakota (78.7%)
  4. Oregon (78.6%)
  5. Michigan (75.3%)
  6. Washington (74.4%)
  7. Rhode Island (73.9%)
  8. Florida (73.7%)
  9. Hawaii (71.0%)
  10. Virginia (70.7%)

  1. Illinois (49.7%)
  2. Mississippi (49.6%)
  3. Alabama (49.1%)
  4. New Jersey (48.0%)
  5. Nevada (47.1%)
  6. Georgia (46.2%)
  7. Wisconsin (46.1%)
  8. Kentucky (46.1%)
  9. Texas (44.9%)
  10. Louisiana (33.8%)
The score shown for each state is the percentage of available Retirement Benefits Score points that the retirement system averages overall for all open retirement plans available to public school teachers for the 2022-23 school year.

 

How States are Ranked

Our approach to ranking states is to grade each retirement plan offered to public school teachers based on the quality of benefits offered to three groups of people: those who are only going to teach for 10-years or less (“short-term” teachers), those who are going to spend 10-20 years in the classroom (“medium-term” teachers), and those who will teach in K–12 education for their entire lives (“full career” teachers).

This ranking includes all types of retirement plans for teachers, including “pension” plans, “defined contribution” plans, “guaranteed return” (or “cash balance”) plans, and “hybrid” plans that blend together various elements from the first three plan types.

While most teachers do not make their job decisions based on the retirement benefits being offered, today’s workforce is highly mobile and very much in flux. It is easily conceivable that someone who is getting their teaching certificate or finishing up an education program or considering changing professions might have some flexibility in where they want to go to work.

Best U.S. States for New Teacher Retirement Benefits front page.

 

Read the Report for Full Details on How We Measured Each Teacher Retirement Plan

 

State Ranking

 

 

States Ranked by Best Retirement Plan Available to New Public School Teachers

wdt_ID Rank State Best Plan Available (Design Type) Overall Retirement Benefits Score "Short-Term" Teacher Score "Medium-Term" Teacher Score "Full Career" Teacher Score
1 1 South Carolina DC Plan (Pension Option Available) 94.20% 86.20% 96.40% 100.00%
2 2 Tennessee Hybrid 88.20% 77.90% 86.70% 100.00%
3 3 South Dakota Hybrid 78.70% 62.30% 75.50% 98.30%
4 4 Oregon Hybrid 78.60% 59.30% 76.60% 100.00%
7 5 Michigan DC Plan (Hybrid Option Available) 75.30% 58.30% 67.70% 100.00%
10 6 Washington Pension (Hybrid Option Available) 74.40% 52.20% 72.60% 100.00%
11 7 Rhode Island Hybrid 73.90% 60.00% 63.30% 98.30%
13 8 Florida DC Plan (Pension Option Available) 73.70% 66.50% 63.00% 91.80%
14 9 Hawaii Hybrid 71.00% 41.70% 71.50% 100.00%
15 10 Virginia Hybrid 70.70% 51.50% 62.30% 98.30%
Notes:
(1) “Pension” means a defined benefit pension plan, “DC plan” means a defined contribution plan, “GR plan” means guaranteed return plan (or cash balance plan), and “Hybrid” means a hybrid plan that combines elements of pension, DC, and/or GR plans.
(2) Different retirement plan designs (pension, DC, guaranteed return, hybrid) have different available Retirement Benefits Score points, given the underlying variance in the kind of provisions offered by each plan design. The percentages shown are the percentage of available Retirement Benefit Score points.
(3) The following states offer multiple plans to teachers who must make a choice which they want to join: Florida, Indiana, Michigan, Ohio, Pennsylvania, South Carolina, Utah, Washington.
(4) The following states show average scores for a statewide teacher plan and separately managed municipal teacher plan: Illinois, Minnesota, Missouri, New York
(5) Colorado has separate pension plans for Denver Public Schools and all other state school districts, but both plans are managed by the same state administrative organization.
(6) Nevada has two pension plan designs with different contribution rate structures. In most school districts the employer decides which to offer, but in some places employees have a choice.
(7) Rhode Island has different hybrid plan tiers of benefits based primarily on whether or not an individual is enrolled in Social Security.
(8) Texas has two pension plan designs that new members can join that differ slightly in their provisions based on the previous state employment history of the individual.

 

What All of This Data Means for Teachers

Many of the lowest scoring retirement plans for teachers are those that were created in the years following the Great Recession.

While some states replaced their pension plans with lower-risk alternative plan designs that offered comparable benefits, others simply reduced the value of pension benefits offered to new teachers. The net result is that the value of pension benefits today are roughly $100,000 less than they were in 2005, a 13% decline over the past two decades.

Teachers who were already hired before states began creating new tiers of benefits with less value will still retire with the benefits they were promised. This means the benefit value reduction is going to be felt primarily by new generations of teachers.

All of the new pension plans and benefit tiers were put in place as part of a wave of legislation to reduce costs and the risks to taxpayers from future investment shortfalls. These goals are understandable in the context of economic recession and financial volatility. And in the years since as teacher pension plans have accumulated over $600 billion in pension debt — i.e., unfunded liabilities — the costs of paying this down have become an acute burden for states and school districts.

But the state legislatures who chose to continue offering pension benefits only through a lower valued tier of benefits have effectively shifted the costs of their legacy retirement plans on to educators. By cutting the benefit values for future teachers, states are forcing those individuals to find additional ways to use their salaries to save for retirement independent of the state retirement system. The best U.S. States for new teachers do not put teachers in this position.

 

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Details & Methodology Notes

Our ranking approach starts by grading each teacher retirement plan using Retirement Security Report methodology. This assigns a Retirement Benefits Score to each plan based on how well they are serving short-term teachers, medium-term teachers, and full career teachers. We blend those scores together to get an average overall score for each retirement plan. And that is what is used to determine the score for each state.
If a state only has one retirement plan that is open to enrolling new teachers, then the score for that retirement plan is the score for that state. If a state has multiple retirement plans available for new teachers to join, then we calculate the average score of those plans, and that is the score for the state.
Using this approach, the best state in the country for new teacher retirement benefits is Tennessee. Their hybrid plan for teachers serves all members well, including earning 100% of available Retirement Benefits Score points for full career teachers and 77.9% of available points for short-term teachers.
For states like Tennessee, South Dakota, or Oregon, the score for the one hybrid plan that they have available for new teacher is how we’ve ranked the state itself. For states like Pennsylvania and Michigan, each of which offers the choice of a hybrid retirement plan or defined contribution plan, we’ve averaged the scores for those plans to come up with a ranking for the state itself.
An example of how this works is South Carolina. They offer teachers the choice of a pension plan or defined contribution plan. The defined contribution plan on its own is actually the highest scoring teacher retirement plan in the country, but the South Carolina pension plan does not get very good scores. The average of those two puts South Carolina in fourth among the states with 78% of available points scored — 10% percentage points below Tennessee.
In cases where a state has a plan for teachers that is intended to be supplemental to primary retirement benefits or is only offered to part-time teachers, we do not include that in the state’s average. We also do not include retirement plans that are only offered to non-certified public school employees or plans exclusively for higher education employees.

Introducing the Retirement Security Report Teacher Edition

On June 28th, Equable Institute issued the Retirement Security Report Teacher Edition (2022). The report builds on The Retirement Security Report (RSR) initiative launched last year that evaluated the quality of retirement benefits offered to public workers nationwide using Equable’s Retirement Benefits Score methodology for all 335 statewide retirement plans currently open to new hires at that time.

The Teacher Edition of the report is an in-depth look at the 316 retirement plans currently offered to teachers and non-instructional staff in the U.S., including those offered to new hires and legacy plans with active enrollees – adding more than 200 plans to both our benefits database and interactive retirement security scorecards. The resulting omnibus analysis is comprised of four papers – a summary report and 3 special reports – that illuminate the state of teacher retirement benefits today.

 

Summary Report: “The National Landscape of Teacher Retirement Benefit Security”

The National Landscape of Teacher Retirement Benefit Security provides an overvie of teacher retirement benefits in America. The paper highlights the trends in the value of pension benefits, evaluates how well teachers are being served by the retirement plans offered to them based on plan type, and other key trends and analysis that are further expanded upon in the three special reports.

Read and Download the Summary Report 

 

Special Report #1: “The Fading Value of Teacher Retirement Benefits in America”

Special Report #1 looks at historical trends in the value of teacher retirement benefits. Analyzing lifetime benefit values going back to 1965, the report shows teachers today enrolled in a pension will earn 13% less in retirement than a teacher hired before the Great Recession. The report also evaluates similar trends in value for other retirement plan types.

 

Read and Download Special Report #1

 

Special Report #2: “The Best U.S. States for New Teacher Retirement Benefits”

Special Report #2 ranks states by the quality of their retirement benefits offered to new teachers using Equable’s Retirement Benefits Score methodology. The report offers two rankings: The first based on the best-scoring plan offered to teachers in each state and the second based on the average score for all plans.

 

Read and Download Special Report #2

 

Special Report #3: “Important Elements of Quality Teacher Retirement Plans”

Special Report #3 analyzes the design elements of the top-scoring plans in the Retirement Security database. The paper illuminates the best practice in plan design that help to ensure retirement income security for teachers.

 

 

Read and Download Special Report #3

 

 

In the coming days and weeks, we will be highlighting key findings and more data from the Retirement Security Report Teacher Edition. Visit equable.org/rsr to read more RSR content and learn more about the initiative.

About the Retirement Security Report 
The RSR is a universe of in-depth research, interactive tools, policy scores and other resources to shed light on the quality and value of retirement benefits for all public workers. All RSR projects are based on data from our comprehensive benefit database of retirement plans offered to public workers and use an open-source scoring methodology that accounts for three primary criteria: Eligibility, Income Adequacy (based on a 70% pre-retirement income replacement rate), and Flexibility & Mobility.

 

Infographic: The Protections for Arizona’s Public Pensions

Arizona teachers’, public safety officers’, and public workers’ pension benefits are entitled to certain protections under state law and affirmed by court rulings. At the same time, the state does have some legal precedent that allows them to change particular aspects of retirement benefits.

In other words, there are parts of public pension benefits that can be changed by future state laws, but only certain parts of those benefits.

Equable Institute partnered with Columbia Law School’s Center for Public Research and Leadership to create infographics that map states’ pension governance. Understanding the legal environment for pension policies can be confusing for both lawmakers and public workers, but illuminating legally permissible policy pathways to improve funding sustainability and ensure adequate retirement income security for states’ workforces is essential.

In the case of Arizona, state law allows the legislature to increase employee contributions and change cost-of-living adjustments for active employees enrolled in specific retirement plans (please see infographic below).

The legal environment is favorable for these shifts – meaning that state law and legal precedent allows for changes to these aspects of pension policy.

Arizona law stipulates that vesting periods and benefit calculations can not be adjusted for active employees, unless the Legislature were to pass a constitutional amendment.

It is important to note that current retirees’ benefits have greater legal protection than those of active employees. Apart from reduced or eliminated COLAs, current retirees’ benefits cannot be taken away or reduced.

Disclaimer: The information here doesn’t constitute legal advice or representation. Equable is not necessarily recommending any of the policies discussed in the infographic. Some may not work for certain states, others may not be desirable policy. Ultimately, any pension policy change should honor promises made to public workers and put them on a path to retirement security, while ensuring sustainable funding measures. 

Infographic: State Funded Ratio Histories

Funded Ratio History for U.S. Statewide Pension Funds

Download this infographic here.

These graphics originally appeared in the December Update to State of Pensions 2020. Read the report at Equable.org/stateofpensions.

Individual state graphics are available for download here

Arizona State Retirement System at a Glance

The Arizona State Retirement System provides benefits to more than a half-million members, including more than 100,000 retired members, according to its website. Here’s everything you need to know about the Grand Canyon State’s retirement system.

Right now, the Arizona State Retirement System offers its members a Guaranteed Income plan. Unlike many states’ plans, Arizona’s public workers don’t have a vesting period — meaning they’re eligible to gain the right to pension contributions from their employer upon enrolling in the system. However, benefits and refundable contributions available to members will vary depending on a member’s years of service.

Like most states, members are allowed to enroll in Social Security (some states bar public workers from joining Social Security due to Constitutional concerns).

It takes 28 years before a public worker’s pension is worth more than what they’ve paid into the plan. As of June 2020, only 12% of Arizona’s teachers and municipal workers ever reach that point and 5% ever receive a full pension, based on teacher retention assumptions provided by the retirement system.

Almost 60% of new teachers, municipal employees, and state workers will not vest in ASRS and less than 2% are expected to work a full career. The majority of new ASRS members will not receive any benefits. Those who vest need to work 20 years to receive approximately $2,250 per month in retirement income.

Arizona’s State Retirement System has a $17.3 billion pension funding shortfall, also called pension debt. Unless major funding improvements are enacted by the state’s legislature, it will take 27 years before ASRS closes its pension debt.

Arizona State Retirement System at a Glance

Download the report: Arizona State Retirement System at a Glance

Understanding the State of Teacher Pension Funding in 2020

Teachers and educators make up the largest group of public employees in the country. Roughly half of the pension promises made by states and cities have been made to public school employees. But roughly half of the pension debt in America is held by teacher pension plans too. Here is a snapshot of the state of teacher pension funding in 2020.

Teacher pensions funding fact sheet, page 1 of 2

Teacher pension funding fact sheet page 2 of 2

Click Here to download this fact sheet. To learn more about pension funding for all professions, check out Equable’s full  State of Pensions 2020 report.

Which States Have Laws that Allow for Police Pension Forfeiture?

If a police officer commits a crime in the course of performing their duties, they may be at risk of losing their pension. But only in certain states.

Most states have some kind of “pension forfeiture” laws on the books. These laws usually are related to public employees that are either convicted of, or plead no contest to, a felony or unlawful killing.[1] Only 23 of the state laws cover law enforcement employees, such as police officers.[2] There are three states that might cover police, depending on how they’re interpreted, and 24 states without laws covering police.

The details about what kind of crimes will lead to pension being stripped from a police officer vary from state to state. Usually the forfeiture law is limited to on-duty offenses, other times it is not. A few states allow for pension benefit reductions rather than taking the whole pension away. And the process for determining whether a pension is to be forfeited isn’t always the same: some states automatically strip pensions from individuals under these circumstances, other states have judges order the pension taken away or require pension boards to hold  proceeding to consider taking the right to a pension away.

For complete details, please review the relevant statutes in your state.

If you are interested in learning more about the benefits offered to public safety officers in your state, check out the Retirement Security Report.

Disclaimer: This article and infographic is not intended as legal advice or formal legal analysis. 

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Notes:

[1] There are seven states with pension forfeiture laws that do not apply to police officers, including: Delaware and Minnesota (laws only applies to surviving beneficiaries who commit an unlawful killing, not active members); Indiana and South Carolina (laws allows for pension benefits to be used as restitution for theft or embezzlement of public property, but does not otherwise require forfeiture for committing a crime); New Mexico and North Carolina (laws allow for pension forfeiture of elected official benefits only); New York (a 2018 law only allows pension forfeiture for elected officials, judges, and gubernatorial appointees)

[2] There are three states with laws that could be interpreted as covering police officers in addition to the 24 listed on the map above. Texas has a pension forfeiture law that only applies to the state Employees’ Retirement System, which does include some state police officers, but does not cover the vast majority of police around the state. Arkansas and Montana have laws that strip the pension of a public employee if they commit an unlawful killing, but only if the person they kill is another public employee.

Funded Status

Fitch: Arizona Riskiest Pension Investor in Nation

Fitch Ratings released a report last week evaluating the asset allocations of the largest public sector pension plans in the U.S.

They ranked states based on the level of investment risk in each state’s largest pension funds, and measured the performance of states over the past few decades against their own assumed rates of return

Specifically, Fitch measured the percentage of a given pension fund invested in “equities and alternatives,” and ranked state pension funds with the largest allocation to these asset class categories as having the most risk. Based on this approach, the riskiest state in the country for pension investments, according to Fitch, is Arizona.

The methodology used by Fitch weights the major plans in each state by market value of assets, so for Arizona the ranking is heavily influenced by the State Retirement System (ASRS, with $40.2b in assets as of last year compared to $7.3b in the Public Safety Personnel Retirement System).

It is worth noting that these figures are based on fiscal year end 2017 data, and since then ASRS — the largest system in Arizona — has actually moved to expand its portfolio of real estate and private equity investments. Currently, ASRS is assuming a 7.5% rate of return, which according to their own investment advisors only has a roughly 50% probability of success. This is one reason that the Urban Institute recently wrote, in a paper analyzing ASRS, that the pension fund is in a somewhat precarious position.

The Pension Integrity Project also analyzed ASRS, and benchmarked the pension fund’s portfolio against capital market assumptions from a range of respected financial firms, and found the probability of hitting a 7.5% rate of return ranges from 20% to 30% (see slide 16 in this report).

Arizona is certainly not alone with its heavily equities and alternatives portfolio. According to Fitch, West Virginia and Alaska are close behind. Michigan also appears to be targeting a riskier portfolio than Arizona, but hasn’t quite allocated its assets according to those internal targets.

Taking on large amounts of risk is not inherently problematic. Alaska, for example, has large ebbs and flows in natural resource revenue, meaning state leaders might feel they have the capacity to cover for underperformance. On the flip side, West Virginia might be allocating to risky investments because it is resource-constrained in being able to make contributions required assuming lower investment returns.

For Arizona, though, the level of risk taken is complicated by the historic performance of investments. Fitch data, which again, comprises investment returns for more than just ASRS, but is heavily weighted towards ASRS due to its size, shows that Arizona has been among the six worst performing states relative to assumed rates of return.

The average assumed return in the Fitch data for Arizona is 8%, but the average actual return from 2001 to 2017 is less than 6%. This is a considerable shortfall, but does not mean that Arizona’s funds have necessarily been bad investors. Many other pension funds earned actual returns lower than Arizona. And while PSPRS is a notably poor investment performer, ASRS in particular has been among the better performing pension funds in the country. What it means is that Arizona’s pensions plans have underperformed their targeted investment assumption.

Because pension plans(specifically final average salary-style defined benefit plans) are based on contributions and investment returns being enough to pay for promised benefits. But what is most important is the plan’s investment performance performance relative to their return assumptions. Indiana, for example, has barely earned more than 5% since 2001 (as can be seen in the chart above), but it was also targeting a much lower investment return than Arizona. Because Indiana’s returns have been closer to the investment target, they are ranked higher in this category than Arizona.

Collectively, this report from Fitch is yet another signal that public plan stakeholders in Arizona should be reviewing the levels of risk associated with their retirement systems and consider how to improve funding policy to ensure long-term sustainability. Labor leaders (in particular teacher groups), municipal employers, and other management stakeholders should be looking to collaborate with legislative leaders on a plan to address the levels of investment risk among Arizona’s pension funds.

To learn more about the funding challenges facing ASRS, check out our previous posts here and here.

This article was originally published on our Medium blog on May 14, 2019.

Funded Status: Arizona