Teacher Pension Reform: Lessons and Warnings From West Virginia
West Virginia’s attempt to reshape its teacher retirement system in the 1990s and early 2000s is often cited as a cautionary tale to block other teacher pension reform efforts across the country.
Critics argue that because West Virginia replaced its pension fund with a defined contribution (DC), 401(k)-style plan in the early nineties, and then reverted back to the original pension plan in 2005, that pension reform can’t work. But that version of West Virginia’s story is misleading and incomplete.
In Bellwether’s new report, “Teacher Pension Reform: Lessons and Warnings From West Virginia,” we modeled the wealth accumulation for teachers in the pension fund, before and after the reform, as well as the intervening DC plan. We found that all of the plans were poorly constructed from the outset and fail to provide a significant retirement benefit to a majority of West Virginia’s educators. The problem was not that pension reform cannot work, or that DC plans are inherently a better option. Rather, the key takeaway is that states should carefully examine their current retirement system and consider what reforms are necessary to ensure they provide high-quality retirement options to all educators in the plan.
Teacher pensions present a growing financial crisis across the country, to the tune of $500M. West Virginia’s experiences with reform can be instructive for states as they seek to navigate their pension problems.
When states consider incorporating DC plans, they should consider including five key features:
- Automatically enroll employees into the program;
- Set the shortest possible vesting period for teachers to qualify fully for their retirement benefits;
- Establish employer and employee contribution rates that, at minimum, total between 10 and 15 percent of salary;
- Provide low-cost options and life cycle funds that adjust an employee’s portfolio as she gets closer to retirement; and,
- Create an actionable and accountable plan to pay down unfunded liabilities.
Pension reform is not an escape from the obligations owed to current and retired teachers; rather, it is a change that allows state the opportunity to re-think how to provide tomorrow’s teachers with a more valuable benefit than they could have hoped for under existing plans. Failing to learn the lessons from West Virginia will, in the end, come at great cost to teachers and states alike.
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