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Pension Neutrality: Minnesota

Retaining Effective Teachers Policy

Look at National Findings
Goal

The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.

Meets goal
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Neutrality: Minnesota results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/MN-Pension-Neutrality-9

Analysis of Minnesota's policies

Minnesota's pension system is based on a benefit formula that is neutral, meaning that each year of work accrues pension wealth in a uniform way until teachers reach Social Security age.

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). 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.

Minnesota's pension plan is commended for utilizing a constant benefit multiplier of 1.7 percent for service through June 30, 2006, and 1.9 percent for service earned after that date. Vested teachers in Tier II of the state's pension system may retire with unreduced benefits at the retirement age that they would qualify for unreduced Social Security retirement benefits, or age 66, whichever comes first. Early retirement with reduced benefits is available to all vested teachers at age 55.

Tier I of the state's system does allow unreduced retirement based on years of service, but this tier has been closed since July 1, 1989.

Citation

Recommendations for Minnesota

State response to our analysis

Minnesota had no comment on this goal. The state did refer to its comments made in response to Goals 4-G and 4-H.

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Research rationale

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.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "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 (2006); and Janet Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development (May, 2008).

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group (2010).

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