Pension Flexibility: Massachusetts
Pensions Policy
Analysis of Massachusetts's policies
Massachusetts 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.
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. Massachusetts's vesting at 10 years of service is very late and limits the options of teachers who leave the system prior to this point. According to a recent report, about 36 percent of employees in Massachusetts's teacher-covered pension plan vest, meaning that 64 percent do not become eligible for a pension and, therefore, can only collect their refundable contributions.
Many teachers in Massachusetts will leave the system before they reach 10 years of service. Non-vested teachers who choose to withdraw their contributions upon leaving only receive their own employee contributions plus three percent interest. Vested teachers only receive their own employee contributions plus the full amount of interest credited to their accounts. This means that those who withdraw their funds accrue no benefits beyond what they might have earned contributing to basic savings accounts. Therefore, teachers leaving the pension system would have saved only 11 percent of their salary plus interest (see pension sustainability goal), which is below the level conventionally recommended by retirement advisers for individuals not also contributing to Social Security. While Massachusetts's mandatory contribution rate allows for flexibility in teachers' retirement savings, it also means that the state needs to educate teachers 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.
Massachusetts 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. Massachusetts's plan allows teachers with one year of service credit 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 Massachusetts with more teaching experience. In addition, teachers must have at least as many years of "matching" Massachusetts' service in order to purchase credit for teaching out of state. The state's plan also allows for the purchase of one month per approved leave of absence. This is a disadvantage for teachers who may need to take longer approved leaves of absence, such as for maternity and paternity leave.
Recommendations for Massachusetts
Offer teachers a pension plan that is fully portable, flexible and fair.
Massachusetts 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 teachers in Massachusetts do not participate in Social Security, they 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 Massachusetts maintains its defined benefit plan, it should allow all teachers that leave the system to withdraw their employee contribution with full interest plus matching employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience and approved leaves of absence 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 Massachusetts 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
Massachusetts did not respond to repeated requests to review this analysis.
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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.