Pension Flexibility: New Jersey
Pensions Policy
Analysis of New Jersey's policies
New Jersey 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. The state, however, is commended for offering a fully portable supplemental savings plan.
Teachers in New Jersey also participate in Social Security, so they must contribute to the state's defined benefit plan in addition to Social Security. Although retirement savings in addition to Social Security are good and necessary for most individuals, the state's policy results in mandated contributions to two inflexible plans, rather than permitting teachers options for their state-provided savings plans.
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. New Jersey's vesting at 10 years of service is very late and limits the options of many teachers who leave the system prior to this point.
Many teachers will leave the system before they reach 10 years of service. According to a recent report, only 55 percent of employees in New Jersey's teacher-covered pension plan vest, meaning that 45 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions. Teachers in New Jersey with less than three years of service who choose to withdraw their employee contributions upon leaving only receive their own contributions without interest. Teachers with at least three years of service receive their employee contributions plus 2 percent interest. This means that those who withdraw their funds accrue fewer benefits or at least no benefits beyond what they might have earned had they simply put their contributions in basic savings accounts. Furthermore, 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.
New Jersey 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. New Jersey's plan allows teachers to purchase time for previous teaching experience, up to 10 years. In addition, the amount of years purchased may not be used to qualify for any state or employer health benefits. While better than not allowing any purchase at all, this provision disadvantages teachers who move to New Jersey with more teaching experience. The state's plan also allows teachers to purchase up to two years of service for personal illness, and maternity leave is considered personal illness; however, teachers on maternity leave wanting to purchase more than three months must submit a doctor's note that the mother was disabled due to pregnancy. Teachers may also purchase up to three months for personal reasons. This is a disadvantage to any teacher who needs to take more than three months of a leave for paternity or maternity care, or for other personal reasons.
The state is commended for offering a fully portable supplemental savings plan known as the Supplemental Annuity Collective Trust (SACT). SACT has two plans, one made with after-tax contributions and another 403(b) plan funded with pre-tax contributions.
Recommendations for New Jersey
Offer teachers a pension plan that is fully portable, flexible and fair.
New Jersey 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. As the sole option, however, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because teachers in New Jersey participate in Social Security, they are required to contribute to two defined benefit-style plans.
Increase the portability of its defined benefit plan.
If New Jersey maintains its defined benefit plan, it should allow all teachers that leave the system to withdraw interest and employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience, at least one year per approved leave of absence, and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.
Offer an employer contribution to the supplemental retirement savings plan.
While New Jersey at least offers teachers the option of a supplemental defined contribution savings plan, this option would be more meaningful if the state required employers also to contribute.
State response to our analysis
New Jersey recognized the factual accuracy of this analysis.
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New Jersey
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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.