Pension Neutrality: Louisiana
Pensions Policy
Analysis of Louisiana's policies
Louisiana's pension system is based on a benefit formula that is not fully neutral, meaning that each year of work does not accrue pension wealth in a uniform way until teachers reach conventional retirement age, such as that associated with Social Security.
Teachers' retirement wealth is determined by their monthly payments and the length of time they expect to receive those payments. Monthly payments are usually calculated as final average salary multiplied by years of service multiplied by a set multiplier (such as 1.5 percent). Higher salary, more years of service or a greater multiplier increases monthly payments and results in greater pension wealth. Earlier retirement eligibility with unreduced benefits also increases pension wealth, because more payments will be received.
To qualify as neutral, a pension formula must utilize a constant benefit multiplier and an eligibility timetable based solely on age, rather than years of service. Basing eligibility for retirement on years of service creates unnecessary and often unfair peaks in pension wealth, while allowing unreduced retirement at a young age creates incentives to retire early. Plans that change their multipliers for various years of service do not value each year of teaching equally. Therefore, plans with a constant multiplier and that base retirement on an age in line with Social Security are likely to create the most uniform accrual of wealth.
Louisiana's pension plan is commended for utilizing a constant benefit multiplier of 2.5 percent. In addition, the state is commended for basing retirement eligibility on age, regardless of years of service. Vested teachers may, however, retire at age 62 (effective July 1, 2015) without a reduction in benefits allowing teachers to be paid full benefits by the state well before Social Security's retirement age. This provision, along with the state's early retirement based on years of service, may encourage effective teachers to retire early, and they fail to treat equally those teachers who enter the system at a later age and give the same amount of service.
Recommendations for Louisiana
Align eligibility for retirement with unreduced benefits with Social Security retirement age.
Louisiana allows teachers to retire before conventional retirement age. As life expectancies continue to increase, teachers may draw out of the system for many more years than they contributed. This is not compatible with a financially sustainable system (see pension sustainability goal). If retirement at an earlier age is offered to some teachers, benefits should be reduced accordingly to compensate for the longer duration they will be awarded.
State response to our analysis
Louisiana responded that the analysis concludes that Louisiana's pension system is based on a benefit formula that is not neutral. NCTQ finds that to qualify as neutral, a pension formula must utilize a constant benefit multiplier and an eligibility timetable based solely on age, rather than years of service. NCTQ correctly recognizes TRSL's defined benefit plan provides a regular retirement benefit formula with a constant benefit multiplier of 2.5%.
NCTQ refers to TRSL's retirement eligibility at age 60, however, effective July 1, 2015, vested teachers retire at age 62 without a reduction in benefits (Act 226 of 2014). Members of TRSL hired on or after January 1, 2011 and before July 1, 2015, must reach age 60 to qualify for a regular retirement benefit. For members hired prior to January 1, 2011, to be eligible for regular retirement, a TRSL member must achieve 30 years of service, 25 years of service at age 55, or five years of service at age 60.
Louisiana added that the retirement benefit for all regular retirees is determined using the following formula: years of service x 2.5 percent x final average compensation. This allows for a uniform determination of benefits, whether an employee begins employment in the teaching profession at age 25 or 35, thus treating all members equally regarding the benefit amount to be received based on years of service.
The state also indicated that the TRSL plan provides an incentive to career educators and increases longevity in the profession, while, with a five-year vesting, permitting all vested members to retire at age 60 or 62, depending on their date of hire. TRSL's current regular retirees retired on average at 58 years of age.
In addition, TRSL has a Deferred Retirement Option Plan (DROP), which results in many members working past retirement eligibility. The average age for those choosing to continue working after they complete DROP is 63. Louisiana encourages NCTQ to review other factors that may affect retirement decisions such as spousal retirement and health status, as well as the effect of retirement eligibility age increase on entry into the teaching profession.
Updated: December 2017
Last word
The analysis states that Louisiana's pension system is based on a benefit formula that is not neutral because wealth does not accrue uniformly until teachers reach conventional retirement age, such as that associated with Social Security. The state's retirement ages of 62 is well before the normal retirement age of Social Security and creates a large, uneven spike in wealth when teachers reach retirement age. The state also has early retirement based on years of service, which creates additional spikes in pension wealth.
The analysis covers newly hired teachers, as their plans reflect the state's current policy. Teachers hired prior to January 1, 2011, do not have a neutral formula and have even more spikes in pension wealth.
Benefits are determined uniformly, regardless of the age a person entered teaching in Louisiana. However, with eligibility for regular or early retirement set on years of service, total wealth of benefits is not accrued evenly. The person that entered teaching earlier in life will reach retirement eligibility based on years of service earlier than someone who started later in life. Their pensions each month would be the same, but the person who started earlier would receive the benefit, on average, for a longer period of time and therefore have received a higher amount of total benefits, or total pension wealth.
As for the state's DROP program, it is only a temporary fix to the structural problem of allowing early retirement without reduced benefits. This is discussed further in the rationale for this goal.
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Research rationale
Another way that pension benefits are awarded unfairly is through the common policy of setting retirement eligibility at different ages and years of service. For example, in a given state, a teacher with 30 years of service may retire at age 55, while teachers with fewer years of service may not retire until age 62. This means that a teacher who started teaching in this state at age 25 would reach 30 years of service at age 55 and receive seven additional years of full retirement benefits beyond what a teacher that started at age 32 and cannot retire with full benefits until age 62 would receive. A fair system would set a standard retirement age for all participants, without factoring in years of service.
Pension systems affect when teachers decide to retire as they look to maximize their pension wealth. The year teachers reach retirement eligibility by age and/or years of service, their pension wealth peaks; pension wealth then declines for each year they work beyond retirement age.[2] Plans that allow retirement based on years of service create unnecessary peaks, and plans that allow a low retirement age create an incentive to retire earlier in one's career than may be necessary. For every year teachers continue to work beyond their eligibility for unreduced retirement benefits, they lose that year of pension benefits, thus decreasing their overall pension wealth. Although their yearly pension benefits would continue to rise as they earn additional service credit, it would only be at a small percentage per year, which would not make up for the loss of each year of benefits.
To try to balance this incentive to retire, some states have created DROP (Deferred Retirement Option Plan) programs. DROP programs allow participants to place their monthly pension benefits in a private investment account while still teaching and earning a salary, thus retaining those benefits.[3] These teachers are, in effect, earning their pension and salary at the same time, and often at a relatively young age.
A DROP program is a band-aid on the problem; it does not fix what is structurally wrong: retirement at an early age without reduction of benefits. For example, the hypothetical teacher above decides to forgo retiring at age 47 in order to wait and qualify for her state's DROP program at age 55. She now has 33 years of service and has reached a pension equal to 66 percent of her salary. She remains in DROP for the maximum allowable five years. During that time, her five years of lost pension benefits plus her five years of mandatory employee pension contribution have been deposited in a private investment account. Upon retiring at age 60, she would receive the total of that private account plus a lifetime pension benefit annually of 66 percent of her final salary. With the lump-sum payment of her DROP account and monthly pension benefit, she will receive 100 percent of her final average salary for at least 10 years, and, depending on the state, she may also receive Social Security benefits. This generous guaranteed payout would be hard to find in any other profession.
DROP programs do create an incentive for some teachers to remain past their eligible retirement age, but at a high cost. DROP programs mean that districts still must find the funds to pay pension benefits to teachers at a relatively young age when those dollars could be more effectively spent.[4]
[1] For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see: Costrell, R. M., & Podgursky, M. (2011, February). Reforming k-12 educator pensions: A labor market perspective. New York, NY: TIAA-CREF Institute. Retrieved from https://www.tiaainstitute.org/public/institute/research/briefs/institute_pb_reforming_K-12_educator_pensions.html
[2] For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see: Furgeson, J., Strauss, R. P., & Vogt, W. B. (2005). The effects of defined benefit pension incentives and working conditions on teacher retirement decisions. Education Finance and Policy. Retrieved from http://www.andrew.cmu.edu/user/rs9f/aefa_journal_12_31_05.pdf
[3] For additional information on state pension systems, see: Loeb, S. & Miller, L. (2006). State teacher policies: What are they, what are their effects, and what are their implications for school finance? Stanford University: Institute for Research on Education Policy and Practice. Retrieved from http://web.stanford.edu/~sloeb/papers/Loeb_Miller.pdf; and Hansen, J. (2008, May). Teacher pensions: A background paper. Committee for Economic Development. Retrieved from http://eric.ed.gov/?id=ED502293
[4] For further evidence supporting NCTQ teacher pension standards, see: The Segal Group, Inc. (2010). Public employees' retirement system of the state of Nevada: Analysis and comparison of defined benefit and defined contribution retirement plans. Retrieved from https://www.nvpers.org/public/executiveOfficer/2010-DB-DC%20Study%20By%20Segal.pdf