Pension Sustainability: Iowa
Pensions Policy
Analysis of Iowa's policies
As of June 30, 2015, the most recent date for which an actuarial valuation is available, Iowa's pension system for regular members, including teachers, is 82.7 percent funded, an increase of 2.5 percentage points since NCTQ's last report. Its current pension debt exceeds $10,800 per pupil throughout the state. It also has a 26-year amortization period. This means that if the plan earns its assumed rate of return of 7.5 percent and makes its full actuarially determined contribution payments, it would take the state 26 years to pay off its unfunded liabilities. Iowa's system is financially sustainable according to actuarial benchmarks.
Iowa commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 8.93 percent is slightly excessive, considering that districts must also contribute 6.2 percent to Social Security. The mandatory employee contribution rate to the defined benefit plan of 5.95 percent is reasonable. Legislation only recently allowed the pension system to raise contribution rates to meet actuarial recommendations; however, rates can only increase by a total of 1 percent for employee and employer contributions combined (higher than the previous restriction of 0.5 percent total each year).
Recommendations for Iowa
Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded to allow more protection during financial downturns. However, Iowa should consider ways to improve its funding level without raising the contributions of school districts and teachers. In fact, the state should work to decrease employer contributions. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention. Improving funding levels necessitates, in part, systemic changes in the state's pension system. The goals on pension flexibility and pension neutrality provide suggestions for pension system structures that are both sustainable and fair.
State response to our analysis
Iowa was helpful in providing information that enhanced this analysis.
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Pensions
Research rationale
Teacher salaries are just one part of the compensation package that teachers receive. Virtually all teachers are also entitled to a pension, which, upon vesting, provides compensation for the rest of their lives after retirement. In an era when retirement benefits have been shrinking across industries and professions, teachers' generous pensions remain fixed. In fact, 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.
Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices. Without reform, these systems are a house of cards, vulnerable to collapse as funding cannot keep up with promised benefits. And it is taxpayers who will have to pay if it all tumbles down.
Pension plans disadvantage teachers early in their careers by overcommitting employer resources to retirement benefits.
Pension Sustainability: 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.