NCTQ study findings called into question

February 3, 2015

The following response to the NCTQ study comes from the National Council on Teacher Retirement

A new “report card” from the National Council on Teacher Quality (NCTQ) claims that “70 cents on every dollar contributed to state teacher pension systems pays for debt, not retirement benefits,” and gives States an average overall grade of C- for their teacher pension policies.  The report, entitled Doing the Math on Teacher Pensions: How to Protect Teachers and Taxpayers, was released on January 27, 2015, and  a press release accompanying it says the report “challenges the claims of pension boards and other groups about the cost-effectiveness, fairness and flexibility of the traditional defined benefit pension plans still in place in 38 states.”
 
According to NCTQ, States are “making it harder for teachers to receive benefits” by increasing vesting periods, and, as a result, are “cheating” teachers out of the “opportunity to build a retirement nest egg.”  NCTQ, which receives more than $800,000 in grants from the Laura and John Arnold Foundation, also repeats the recent claims of other Arnold-funded “studies” that “[f]ewer than half of teachers will qualify for retirement benefits.”
 
“I am not sure how many more times this bogus claim needs to be refuted before these so-called ‘experts’ stop spreading it,” said Meredith Williams, the Executive Director of the National Council on Teacher Retirement (NCTR).  “The facts are that in most cases, the majority of current teachers participating in public DB plans are expected to vest and a large majority of those who vest are expected to retire from the plan.”  Williams was referring to conclusions that the actuarial firm of Gabriel, Roeder, Smith & Company (GRS) reached in their analysis of a 2014 Arnold-funded study entitled Friends without Benefits which made claims similar to those of NCTQ regarding teacher pension benefits.
 
Furthermore, Williams pointed out that there are “many ways in which a retired teacher can receive a benefit from their pension plan without having an uninterrupted career or reaching normal retirement age, which seems to be the only standard that NCTQ claims to exist.”  As he has noted before, these include such things as receiving a disability benefit; qualifying for a vested deferred benefit; returning to employment with the same employer, thus enabling the returning teacher to re-start accrual of retirement service credit; and benefitting from reciprocity agreements between plans, usually within the same state, for those who terminate and are later employed by a different employer.
 
Williams said that he is also concerned with the NCTQ claim that “Across states, an average of 70 cents of every dollar contributed to state teacher pension systems is paying off ever-increasing pension debt” (emphasis added).  While a closer reading of the NCTQ report indicates that their claim apparently concerns contributions made only by employers, the characterization in their press release suggests that this analysis applies to all contributions, including those of employees.  Based on an analysis by Paul Zorn with GRS, such a broader statement “significantly overstates the portion of the total contributions that are used to amortize the plans’ unfunded actuarial accrued liabilities.”
 
As Mr. Zorn notes, the vast majority of teacher retirement systems require member contributions, and if these are included as payments toward the normal cost, as NCTQ appears to acknowledge they are in a footnote, “then it is very likely that the portion of total contributions going to pay down the UAAL is much smaller than 70 cents on the dollar.”
 
Williams also pointed out that the NCTQ claim was apparently based on 2014 data only.  “Such a broad generalization, made on such a narrow snap-shot in time, is irresponsible in my opinion,” William said.  He noted that in the late 1990’s, when the large majority of public pension plans were very close to being fully funded, the percentage of employer contributions devoted to paying down the UAAL would have been much less than the 70 percent NCTQ claims.  He suggested that, as plans’ funding continues to improve, NCTQ’s assertions about an “ever-increasing pension debt” will likely prove false.
 
Finally, Williams challenged the NCTQ claim that public sector DB plans were somehow “cheating” teachers out of their future retirement security.  “I have seen absolutely no data from NCTQ that support the idea that younger employees who devote only a few years to teaching would roll-over any vested monies into another tax-preferred retirement plan when they leave teaching,” Williams said.  In fact, he suggested that research would show just the opposite:  that many if not most of these former teachers cash out their retirement savings.  Indeed, younger workers ages 20 to 39 have the highest cash-out rates from 401(k) plans, with about 40 percent taking money with them when they switch jobs, according to data from Fidelity, the largest administrator of such savings plans.
 
“Indeed, this leakage problem is the unspoken danger in so many portability discussions,” warned Williams.  “Instead of rolling over their money into another retirement savings arrangement, an alarming number of young people―including young teachers, I fear―feel that cashing out makes more sense for them in today’s economy,” he continued.
 
“The fact of the matter is that the DB model provides something much more important, namely benefit portability,” Williams stressed.  Once vested―and about 60% of teacher plans have vesting periods of 5 years or less―contributions can remain in the plan and a retirement benefit, typically one that cannot be outlived, will be available to the employee at retirement no matter how many job changes they may have made after leaving the plan sponsor’s employment, Williams underscored.
 
“All too often, portability that does not result in roll-overs, but instead translates into being able to ‘cash out’ offers nothing more than a false promise of retirement security,” Williams warned.  “I therefore continue to be deeply troubled by these misleading reports that NCTQ and other Arnold Foundation surrogates are producing,” Williams observed.  “As I have said before, they are a clear effort to divide teachers, pitting newer teachers against their older colleagues,” he continued.  “Once again, all teachers work hard to prepare our children for the challenges they will confront in this new economy, and they all deserve the very best from us,” Williams stressed.
 
“Notwithstanding NCTQ’s so-called ‘report card,’ I think NCTR member systems represent a prudent, adequate, affordable, and sustainable long-term commitment to invest in every teacher’s retirement security, during his or her career and beyond,” he continued.
 
“I give NCTQ’s report a grade of F,” Williams concluded.