Pension Flexibility: Georgia

Analysis of Georgia's policies

Georgia only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is not fully portable, does not vest until year 10, and does not provide any employer contribution for teachers who choose to withdraw their account balances when leaving the system. It also limits flexibility by restricting the ability to purchase years of service. 

Some teachers in Georgia also participate in Social Security, so they must contribute to the state's defined benefit plan in addition to Social Security. Although retirement savings in addition to Social Security are good and necessary for most individuals, the state's policy results in mandated contributions to two inflexible plans, rather than permitting teachers options for their state-provided savings plans.

Vesting in a defined benefit plan guarantees a teacher's eligibility to receive lifetime monthly benefit payments at retirement age. Nonvested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Georgia's vesting at 10 years of service is very late and limits the options of teachers who leave the system prior to this point.

Many teachers will leave the system before they reach 10 years of service. Teachers in Georgia who choose to withdraw their contributions upon leaving only receive their own contributions plus interest. This means that those who withdraw their funds accrue no benefits beyond what they might have earned had they simply put their contributions in basic savings accounts. Therefore, teachers leaving the pension system would have saved only 5.53 percent of their salary plus interest (see Goal 4-H), which is significantly below the level conventionally recommended by retirement advisers for individuals not also contributing to Social Security. While Georgia's relatively low mandatory contribution rate allows for flexibility in teachers' retirement savings, it also means that the states need to educate teachers who work in districts not participating in Social Security on what happens if they leave the system and encourage savings in other portable supplemental plans. 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.

Georgia limits teachers' flexibility to purchase years of service. 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. Georgia's plan allows teachers to purchase time for previous teaching experience, up to 10 years. While better than not allowing any purchase at all, this provision disadvantages teachers who move to Georgia with more teaching experience. In addition, this purchase is not allowed until teachers have six years of service in Georgia at which point they may only buy one year of service credit and then may purchase an additional year for each additional year served in Georgia. This makes the purchase cost much more expensive than if calculated earlier in a teacher's career.

The state's plan does not allow for the purchase of approved leaves of absence, which is a tremendous disadvantage, especially to any teacher who needs to take a leave for personal reasons such as maternity or paternity care. However, teachers with at least 25 years of service may purchase up to three years of additional service at the time of retirement.

Citation

Teachers' Retirement System of Georgia, Member's Guide http://www.trsga.com/media/168591/22997_teachersguide.pdf

Recommendations for Georgia

Offer teachers a pension plan that is fully portable, flexible and fair.
Georgia should offer teachers for their mandatory pension plan the option of either a defined contribution plan or a fully portable defined benefit plan, such as a cash balance plan. A well-structured defined benefit plan could be a suitable option among multiple plans. However, as the sole option, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because some teachers in Georgia participate in Social Security, they are required to contribute to two defined benefit-style plans. Those teachers who do not participate in Social Security have no fully portable retirement benefits that would move with them in the event they leave the system.  

Increase the portability of its defined benefit plan.
If Georgia 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 upon the first day of employment, allow the purchase of parental leaves, 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 Georgia 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

Georgia asserted: "If the goal is to retain teachers, then why put a plan in place that makes it easy for teachers to leave the system by allowing them the ability to take all the funds contributed on their behalf with them?  Also, many of those who leave and withdraw their funds do not place the funds into a retirement or savings plan, but instead spend the funds on items other than retirement - ultimately requiring government and taxpayer assistance as they age with no secure retirement income."

The state maintained that 10-year vesting is not a deterrent to teacher retention. If teachers know that they will have to stay in the profession at least 10 years to be entitled to any benefits (retirement, disability or death-in-service), they will strive to achieve that milestone and, hopefully, more to be eligible for the benefits. Changing the vesting period from 10 years to three years will increase the system's liabilities, which is inconsistent with the recommendation in Goal 4-H of maintaining the system's current funding level. Georgia added that a shorter vesting period, such as five years, could be beneficial to recruiting individuals into the profession, especially those who are looking for a second career (retired business professional or retired military personnel).

In addition, Georgia contended that the recommendation in Goal 3-D that the state should extend the minimum probationary period for tenure from three years to five years, which would allow for the accumulation of sufficient data on teacher effectiveness to support meaningful tenure decisions, is inconsistent with the suggested three-year vesting period.

The state continued: "NCTQ believes that if a teacher is able to withdraw both employee and employer contributions from their old retirement system, the funds will be sufficient to purchase all their years of service with the new system and be cost neutral to the new system. In order for the purchase of service to be 'cost neutral', the amount paid by the teacher must be the equivalent of the increased benefits the teacher will receive in retirement with the additional service credits. This is referred to as the full actuarial cost and it is far greater than just the employee and employer contributions with interest. Very few individuals, if any, would have the funds available to them to purchase this service at full actuarial cost, particularly on their first day of employment."

Finally, Georgia stated that the notion that teachers who do not have Social Security coverage have no portable retirement benefits is false. Sixty-five to 70 percent of all teachers in Georgia have Social Security coverage. In most cases, those teachers who do not have Social Security coverage have available to them a 403(b) style of retirement plan funded by their employer in addition to the state retirement plan. 

Last word

NCTQ believes that offering teachers a portable, flexible retirement plan is part of treating teachers as professionals and increasing the value of their compensation. NCTQ does not advocate for teachers to cash out their plans rather than roll them into an acceptable retirement plan; such actions would not only incur tax penalties but place individuals' future financial security at risk. However, NCTQ maintains that it should be the individual teacher's professional choice. Providing teachers seven or eight years into their careers with no portable retirement savings does not contribute to future retirement security or reduce the burden to taxpayers. The risk to the taxpayers is already a factor: They are currently required to contribute excessive amounts to the defined benefit system (see Goal 4-H).

Georgia admits that a five-year vesting period may be beneficial to recruiting individuals into the profession. A three-year vesting could do the same for other individuals, such as spouses of military or university faculty who know they may be more mobile during their career. A 10 year vesting period may encourage the ninth-year teacher to stay until the 10th year, but it does not help the third-year teacher stay until the fourth-year and beyond. Teacher turnover between years three and five is problematic throughout the country.

NCTQ contends that individuals that have access to employer contributions will be better able than individuals with only their own contributions to purchase service at the full actuarial cost.

Vesting and tenure are not related benchmarks in a teacher's career. Vesting grants an employee full access to retirement and possibly other benefits. NCTQ would advocate that teachers vest immediately in an employer matching contribution, but that may require burdensome paperwork to the systems. Three years of service is a mark that teachers have given service to the system, moved passed the initial turn over period and are fully initiated into a school. It is fair to provide them with further compensation in the form of retirement benefits. Tenure grants an employee due process rights associated with nonprobationary status and needs to be tied to effectiveness. Five years allows a state to collect the necessary data. A teacher may be determined to be ineffective and not granted tenure at the five year mark; this does not mean that the teacher should be deprived of five years of retirement benefits. Other professions, such as university faculty, do not tie tenure to retirement benefits. 

NCTQ also maintains that teachers in Georgia without Social Security coverage do not have a guaranteed retirement plan that is fully portable. Optional 403(b) plans are set-up at the discretion of each employer and do not contain a guaranteed employer contribution.