Pension Flexibility: Massachusetts

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. Nonvested 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.

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 Goal 4-H), 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. 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.

Citation

Massachusetts Teachers' Retirement System http://www.mass.gov/mtrs/2members/2members.htm

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 recognized the factual accuracy of this analysis.