Your Pension, Explained

As the economy nose-dives, school pension plans are similarly riding the trough. Many educators once entered the teaching field counting on the promise of a secure retirement at the end of a long, not-so-lucrative career, and now, even that guarantee is slipping.

Eric Hanushek, a senior fellow at the Hoover Institution, Stanford University's public policy research center, has watched the market drag teacher pensions into its monetary black hole.

The downward spiral can be traced back to two issues, he says. The first is that many states are losing revenue from investments in their pensions plans. The second is that the plans, in general, are out of balance, in terms of investment diversity, and/or are poorly structured.

"With the fiscal problems in the market, there is an opportunity to rationalize the structure of these pension plans," Hanushek says. "The current situation is hard to keep track of. Most of these retirement plans are invested in through a number of equities and bonds, and the funds have gone down significantly."

A state or region usually sets up a pension plan for an educator based on a defined-benefit contribution. It's not the typical 401(k) package that some employees pay into through their companies, Hanushek says. Instead, a defined-benefit setup weighs certain actuarial factors such as the number of years a teacher works, location, salary, life expectancy and investment income.

Most teachers are accustomed to the 30/55 plan, meaning that after racking up 30 years in the field, they can claim their benefits at age 55. Many times, that equals 50 to 60 percent of their final salary. Not a bad chunk, right? Not so fast, Hanushek says.

"You'll see a very peculiar pattern of pension rewards with age and teaching experience," Hanushek says. "There is a pattern of increases and changes in the value of pension plans with age that is very peculiar, and it is especially biased toward old teachers that stay put."

For example, someone who has taught for 15 years each in two different states will receive a much lower pension than a teacher who has worked for 30 years in the same state, Hanushek says.

And with the market waning, employers that may have funneled defined-benefit contributions from teachers into failing stocks are looking for any excuse to duck out of the crash. America's 500 largest corporations are carrying a deficit of $200 billion in their pension funds, and most are unable to meet the standards set forth by the Pension Protection Act of 2006.

"States have to report the pension liability, and they're very large, and nobody understands that the funds really have a serious problem," Hanushek says. "Most young people aren't looking at the retirement part of their pension, but it's a huge liability."

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