Pension Sustainability: Indiana
Pensions Policy
Analysis of Indiana's policies
As of July 1, 2015, the most recent date for which an actuarial valuation is available, Indiana's pension system for teachers is 46.4 percent funded, an increase of 0.7 percentage points since NCTQ's last report. Its current pension debt exceeds $11,700 per pupil throughout the state. The plan's amortization period is 26 years. This means that if the plan earns its assumed rate of return of 6.75 percent and makes its full actuarially determined contribution payments, it would take the state 26 years to pay off its unfunded liabilities.
Indiana has two pension plans. The state's "Pre-1996 Account" plan, which is now closed, is a pay-as-you-go system and is only 30.4 percent funded, though actuaries project it to become fully funded by 2036. Indiana's current plan is 92.5 percent funded and projected to be 100 percent funded by 2021. Despite the strong funding of the current plan, Indiana's funding ratio for its total system is still well below conventional standards.
In addition, Indiana's required contributions to its teachers' retirement system leave little room to improve its funding level and amortization period. The current employer contribution rate of 7.5 percent, which the district pays for employees hired after 1995, is reasonable, but districts must also contribute 6.2 percent to Social Security. This puts the state very close to an excessive contribution requirement.
Recommendations for Indiana
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. The state's current plan almost meets this funding level, but the state should maintain efforts to improve the funding of its pre-1996 plan. However, Indiana should consider ways to improve its funding level without raising the contributions of school districts. 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
Indiana was helpful in providing NCTQ with facts that enhanced this analysis.
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Indiana
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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.