Pension Sustainability: New Jersey
Pensions Policy
Analysis of New Jersey's policies
As of June 30, 2015, the most recent date for which an actuarial valuation is available, New Jersey's pension system for teachers is 51.1 percent funded, a decrease of 5.9 percentage points since NCTQ's last report. Its current pension debt is almost $20,000 per pupil throughout the state. It also has an amortization period of over 30 years. This is due to an accounting method, however, in which New Jersey uses an open 30-year amortization period, meaning that the amortization period is reset to 30 years every year. Thus, the unfunded liability is never fully amortized. Under a closed amortization method, if the plan earns its assumed rate of return and makes its full actuarially determined contribution payments, it would take the state over 30 years to pay off its unfunded liabilities. The state will not employ a closed amortization schedule until June 30, 2019. Neither the state's funding ratio nor its amortization period meets conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks.
New Jersey, however, does not commit excessive resources toward its teachers' retirement system. In fact, the employer and state contributions are excessively low because they have not made the actuarially determined contributions. Only 40 percent of the statutory contribution amount was appropriated for FY 2017. Thus, the state is not making the contributions required by its own state law. The mandatory employee contribution rate of 7.06 percent is reasonable. Over the next seven years, the employee rate is set to increase to 7.5 by July 1, 2018, which is still reasonable, but close to excessive in light of the fact that teachers must also contribute 6.2 percent to Social Security.
Recommendations for New Jersey
Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded and had an amortization period of 30 years or less to allow more protection during financial downturns. The state should also not delay using a 30-year "closed" horizon for amortizing its debt rather than its current 30-year "open" amortization method so that the burden of paying today's promises is not put off onto future generations. Furthermore, New Jersey should at minimum make the contributions required by its own law, though ideally the state would make the actuarially required amount.
State response to our analysis
New Jersey was helpful in providing information that enhanced this analysis.
Updated: December 2017
-
New Jersey
Select another topic
General Teacher Preparation
- Program Entry
- Teacher Shortages and Surpluses
- Program Performance Measures
- Program Reporting Requirements
- Student Teaching/Clinical Practice
- Teaching Methods
Elementary Teacher Preparation
Secondary Teacher Preparation
- Middle School Content Knowledge
- Middle School Licensure Deficiencies
- Adolescent Literacy
- Secondary Content Knowledge
- Secondary Licensure Deficiencies
Special Education Teacher Preparation
Alternate Routes
Hiring
- Requirements for Out-of-State Teachers
- Provisional and Emergency Licensure
- Licensure for Substitute Teachers
- Supporting New Teachers
Teacher and Principal Evaluation
Teacher Compensation
Retaining Effective Teachers
Early Childhood Preparation
How we graded
Research rationale
Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices.[3] Without reform, funding is unlikely to keep up with promised benefits and these systems will become increasingly vulnerable to collapse.
Pension plans disadvantage teachers early in their careers. By overcommitting employer resources to retirement benefits, these plans often require districts to depress salaries and restrict incentives. The contribution of employers to their workers' retirement benefits is a valuable benefit, important to ensuring that individuals have sufficient retirement savings. Compensation resources, however, are not unlimited, and they must fund both current salaries and future retirement benefits. Mandated employer contributions to many states' teacher pension systems are extremely high, leaving districts with little flexibility to be more innovative with their compensation strategies.[4] Lower mandatory employer contribution rates (in states where they are too high; in some states they are shamefully low) would free up valuable compensation resources to ensure pension systems are more sustainable and equitable for all teachers. In addition, some states require high employee contributions; the impact this has on teachers' paychecks may affect retention, especially early in teachers' careers.[5]
The burden placed on districts to fund unsustainable pension systems is further exacerbated for those in states where teachers also participate in Social Security, requiring the district to pay even more toward teacher retirement. While retirement savings in addition to Social Security are necessary, states are mandating contributions to two inflexible plans rather than permitting options for teachers or their employing districts.[6]
[1] Doherty, K. M., Jacobs, S., & Lueken, M. F. (2017, February). Lifting the pension fog: What teachers and taxpayers need to know about the teacher pension crisis. Retrieved from National Council on Teacher Quality website: https://www.nctq.org/dmsView/Lifting_the_Pension_Fog
[2] 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
[3] NCTQ's analysis of the financial sustainability of state pension systems is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office. (2007). Government Accounting Standards Board statement No. 25. Retrieved from http://www.gasb.org/st/summary/gstsm25.html
[4] 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
[5] 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
[6] 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