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Client Service August 21, 2020
Massive Teacher Retirements Could Hurt Pensions
It would increase public pension plans’ required contributions and result in lower contributions by members.
Reported by Lee Barney
At a recent webinar hosted by the National Institute on Retirement Security (NIRS), “Will COVID-19 Trigger Teacher Retirements?,” the overwhelming conclusion was that the pandemic could do just that—which would put enormous pressure on school districts’ pension plans.
As Dan Doonan, executive director of NIRS, put it, “Learning about the issue of providing a good education without causing physical harm throughout a pandemic is certainly challenging. We are now over 5 millions cases throughout the U.S., which continues to represent about a quarter of the cases worldwide, and it only took 17 days to reach that mark after we crossed the 4 million mark—so the virus is spreading and it is, tragically, claiming more than 1,000 lives every day right now on a fairly consistent basis.”
A big problem exacerbating the potential of teachers retiring or exiting the workforce en masse, Doonan said, is that in 2009-10, there were 615,842 students enrolled in programs to become teachers. In 2017-18, there were only 312,162 enrolled in such programs, according to the U.S. Department of Education.
“The teacher pipeline has lost 47% of what we had in 2009 and 2010,” he said.
However, Rocky Joyner, senior vice president and actuary, Segal, said what has been a redeeming factor in helping school systems have an adequate number of teachers is the fact that many of them serve long careers, well into their late 60s. “Almost 20% of teachers already have 20 years or more of service,” he said. “Sixty-five percent of teachers are expected to serve 30 years or more, and 68% will serve until their retirement eligibility. So, even though the educational pipeline has been drying up, delayed retirement has helped supply teachers for the classrooms.”
Joyner said he hoped that would continue to offset any movement among teachers to begin retiring early due to fears of contracting COVID-19.
However, should teachers leave the workforce, he said, this will cause “increased benefit payouts, potentially creating cash flow issues. This will increase pension plans’ required contributions, all while teacher shortages” will result in lower contributions by members.
Paul Angelo, senior vice president and actuary at Segal, echoed Joyner’s points, saying, “Early retirements, as a general rule, increase the liability, and if those teachers are not replaced, since we have contributions collected as a percentage of payroll, we will have lower contributions. This will result in an immediate increase in cost to employers, whether they fund their pensions on an actuarial basis or a fixed-rate basis. In both cases, talk to your actuary about doing some kind of modeling, keeping in mind that post-employment benefits, such as medical insurance, will also increase.”
David Lamoureux, California State Teachers’ Retirement System (CalSTRS) deputy system actuary, said conducting modeling risk is extremely important for teacher retirement systems. This should take into account investment, longevity and membership risk, he said. While CalSTRS has 100,000 teachers eligible to retire, currently, only 12,000 to 13,000 of them retire in any given year. Lamoureux said he is worried that number could spike due to teachers’ fears over the virus.
“If we are going to see more retirements or layoffs due to COVID-19, it is very important to model the impact of membership,” he said. “In every recession, we have seen lower than expected investments returns as well as declines in the number of teachers.”
