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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.
0 3 6 9 12 15 18 21 24 27 30 33 36 390
10
20
30
40
50
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.
0 3 6 9 12 15 18 21 24 27 30 33 36 390
20
40
60
80
100
Years of Experience
Cum
ulat
ive
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...
252627282930313233343536373839404142434445464748495051525354555657585960616263646566676869707172737475
$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…
252627282930313233343536373839404142434445464748495051525354555657585960616263646566676869707172737475
$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)
252627282930313233343536373839404142434445464748495051525354555657585960616263646566676869707172737475
$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:
Follow us on Twitter@ChadAldeman@TeacherPension
