Crystal Bridges in NW Arkansas; ID’d by Sue Haskins.
Don’t Ignore Teacher Retirement Benefits is the actual title of a recent article on the website of the Oklahoma Council of Public Affairs (OCPA) by fellow Curtis Shelton. He suggests that Oklahoma teachers receive generous retirement benefits that should be taken into consideration when discussing teacher pay, implying they can be paid less salary because the state is providing such a nice retirement for them. After providing some important background I’m going to rewrite his article.
I agree that retirement benefits, just like health insurance and other fringe benefits, need to be considered when comparing teacher compensation with other labor markets. $50,000 a year with no benefits is not necessarily better than $45,000 a year with paid health insurance and a 2 for 1 employer match of your 401(k) retirement plan contributions. We’d have to do the math. So let’s do it for Oklahoma teachers’ retirement.
Contributions to the Oklahoma Teachers Retirement System (OTRS) are actuarially divided into two parts: first, a “normal cost” percentage that is the current value to the employee for whom the contribution is being assessed, and second, the balance of the contribution which goes to retire or amortize the pension plan’s “unfunded actuarially accrued liability” (UAAL) that is simply catching up, or paying for, past commitments that were made to retired and active employees. To more fully explain I’ll use the information from Table 1 and Table 5 of the 2017 OTRS Actuarial Report.
For 2017 total payroll for active OTRS members was $4,115,686.767 and the system received contributions totaling $998,158,208 which was 24.25% of the payroll. Here’s a helpful summary:
Don’t be distracted by the deviations from 7% and 9.5% contribution rates for employees and employers, respectively; the reasons are not important. What is important is that the state and federal grants are contributing at a combined rate of 7.34%, over $300 million. Those “contributions” are really just revenue flows to pay off the systems $6.5 billion UAAL which, legally (Baker decision), is the state’s obligation. The “Grant” amount is a kind of “in lieu” assessment the state is allowed to take from federal grant payroll to do the same thing.
The normal cost rate is 10.24% but I’m going to use 10.34% which includes all the system’s expenses. That’s the actuarial calculation of the combined contribution rate from the employee (7%) and employer (3.34%) needed to sustain the benefits promised, going forward, for active employees’ current year of service. 3.34% of 2017 payroll is $137.5 million which, together with employee contributions of $293 million, is the annual revenue needed to sustain the system’s current benefit structure for current employees. Another way to say it that might help is if the OTRS were beginning from scratch this year, i.e. no past promises, only future promises, then that’s the amount it would take to support the year’s promises. If the annually calculated “normal cost” is faithfully paid in each year, that’s what it takes to sustain the system and keep the promises made. That is the value to current teachers/employees for the current year—10.34% of which teachers are paying in 7%, so at best enhancing their stated compensation by 3.34%.
The rest of the story, as summarized by this chart, is that the balance of contributions and state direct revenues, almost $568 million, went to pay down the UAAL of the system, being legal and contractual promises already made and mostly for teachers already retired and which is on track to be fully funded in 17 years. Those payments are not new compensation to current employees.
Simply stated then, if average teacher salary is now $45,000, it would be fair to account for the OTRS benefit paid by employers as adding 3.34% for an average salary of $46,500. Here are other articles I’ve posted about this. What follows is his article with my edits.
Don’t Ignore Teacher Retirement Benefits
Teacher compensation debates tend to focus on average salaries. A recent report from the American Enterprise Institute shows that just 3% of media coverage during 2018’s teacher walkouts quantified pension benefits. That’s probably a good thing because if they’d relied on the AEI, the OCPA, or a similar “conservative” think tank in their area, they likely would receive misinformation that exaggerates the current cost of pension benefits. Now, after reading articles about pensions on OCPAThinker.org, I know how to correctly quantify pension benefits.
While annual wages make up the largest portion of teacher compensation, they are not the whole picture. Examining data from the Oklahoma Teachers Retirement System (OTRS) allows for a more complete look at teacher compensation.
First, a comparison of contribution rates between the average 401(k) account (according to Vanguard’s How America Saves) and the OTRS aggregate rate shows a considerablelittle difference. For private 401(k) accounts, the combined employer and employee contribution rate was 10.3% of the employee’s annual salary. OTRS recipientsmembers contribute a rate of 7% while the actuarially determined employer rate that benefits current employees is 9.5%. This gives OTRS participants an aggregate contribution3.24%, making the combined rate, adjusted for system expenses, also 10.3%. The balance of 16.5% of the employee’s annual salary.employer contributions, about 6.2%, goes to pay for past unfunded pension promises and is not compensation for current employees.
Second, data from the Vanguard report and OCPA’s data tool allow for a loose comparison of the total benefits between OTRS benefits and 401(k) account holders. The average retirement age for OTRS recipients is 59.7 while the median potential benefit is $278,963. The median 401(k) account balance for retirees of a similar age (55-64) is $71,105. It appears that the savings discipline and the advantages of pooling teachers’ contributions into a large, professionally managed, retirement system that can invest for the long-term, generates a much better retirement outcome for teachers than do the individualized, high cost, do-it-yourself plans imposed on private sector workers.
Leaving retirement benefits out of the conversation on teacher compensation in Oklahoma ignores an important selling point to those considering entering the cost to taxpayers.profession. According to the fiscal year 2017 Comprehensive Annual Financial Report, taxpayers contributed $715705 million to Oklahoma’s teacher retirement system., of which $568 million went to fund the system’s unfunded liabilities for past promises. In about 17 years those liabilities will be fully funded and that revenue can be used for other state priorities. Just like discussing teacher shortages, having all the facts is crucial to finding the best way forward.
As always lunch is on me for the first to ID the photo location.