Pension Flexibility: Florida
Pensions Policy
Analysis of Florida's policies
Florida offers the option of a defined contribution plan or defined benefit plan for all teachers. Florida provides new teachers with very informative literature describing the advantages, disadvantages and estimated benefit payouts for each type of plan. New teachers choose one plan at the time of employment and are allowed to change their plan once during their active employment. Teachers who do not actively choose a plan default into the defined benefit plan. Florida teachers also participate in Social Security, so choice of retirement plans is particularly appropriate because teachers already participate in one mandatory defined benefit-style plan.
Florida's defined contribution plan is fully portable, flexible and fair to all workers.
Vesting in a defined contribution plan entitles teachers to permanent rights to their own contributions and any available employer contributions. Florida's defined contribution plan vests immediately for their own contributions and after year one for employer contributions. Teachers with at least one year of service in the defined contribution plan who choose to leave employment are fully entitled to the employers' 9 percent contribution and the applicable earnings at the time of withdraw. This is more generous than most other states and helpful to recruit teachers.
Florida's defined benefit plan is not fully portable, does not vest until year eight, and does not provide any employer contribution for teachers who withdraw their accounts. It also limits flexibility by restricting the ability to purchase years of service.
Vesting in a defined benefit plan guarantees a teacher's eligibility to receive lifetime monthly benefit payments at retirement age. Non-vested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Teachers in Florida hired since July 1, 2011 vest at eight years. Teachers who leave the system before vesting have limited options. According to a recent report, about 29 percent of employees in Florida's teacher-covered pension plan vest, meaning that 71 percent do not become eligible for a pension and, therefore, can only collect their refundable contributions.
Teachers in Florida's defined benefit plan leaving the system may not withdraw any employer contributions. Teachers contribute 3 percent of their salary to the pension system and withdraw their own contributions with no interest. This means that teachers who withdraw their funds accrue fewer benefits than what they might have earned had they simply put their contributions in basic savings accounts that earned interest. Further, teachers who remain in the field of education but enter another pension plan (such as in another state) will find it difficult to purchase the time equivalent to their prior employment in the new system because they are not entitled to any employer contribution. Teachers leaving the state, however, could use their one-time opportunity to switch to the defined contribution plan that provides greater portability, in which case teachers can claim both their own contributions and the employer contributions, plus investment gains/losses.
Florida limits teachers' flexibility to purchase years of service within its defined benefit plan. The ability to purchase time is important because defined benefit plans' retirement eligibility and benefit payments are often tied to the number of years a teacher has worked. Florida's plan allows teachers to purchase time for previous teaching experience, up to five years. While better than not allowing any purchase at all, this provision disadvantages teachers who move to Florida with more teaching experience. The state's plan also allows teachers to purchase time up to two years total for all approved leaves of absence, including maternity and paternity leave.
Recommendations for Florida
Increase the portability of its defined benefit plan.
If Florida maintains its defined benefit plan, it should allow teachers that leave the system to withdraw employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.
Offer a fully portable supplemental retirement savings plan.
If Florida maintains its defined benefit plan, the state should at least offer teachers the option of a fully portable supplemental defined contribution savings plan, with employers matching a percentage of teachers' contributions.
State response to our analysis
Florida did not respond to repeated request to review this analysis.
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Florida
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Pensions
Research rationale
Nearly all states continue to provide teachers with a defined benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers. To achieve the maximum benefits from such a plan, a teacher must begin and end his or her career in the same pension system. Teachers who leave before vesting—which is as much as 10 years in some states—are generally entitled to nothing more than their own contributions plus some interest. This approach may well serve as a retention strategy for some, but on a larger scale it fails to reflect the realities of the current workforce. At present, the United States is experiencing an explosion in school-age populations in some states, while other states are experiencing a decline. The nation's workforce needs to be able to respond to these changes. The current workforce is increasingly mobile, with most entering the workforce expecting to change jobs many times. All workers, including teachers, may move to jobs in other states with no intention of changing careers. To younger teachers in particular, a defined benefit plan may seem like a meaningless part of the compensation package and thus fail to attract young talent to the profession. A pension plan that cannot move across state lines and that requires a long-term commitment may not seem like much of a benefit at all.
There are alternatives. Defined contribution plans are fair to all teachers at all points in their careers. These plans are more equitable because each teacher's benefits are funded by his or her own contributions plus contributions from the employer specifically on the individual employee's behalf. This is fundamentally more equitable than defined benefit plans, which are generally structured to require new teachers to fund the benefits of retirees. Moreover, defined contribution plans are inherently portable and give employees flexibility and control over their retirement savings. It must also be noted that defined benefit plans can be portable and fair, if structured as cash balance plans or plans that permit the withdrawal of employer contributions.
Pension Flexibility: Supporting Research
NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.