How many teachers know even the basics about their retirement plan? Too few according to a recent study by Dillon Fuchsman of Saint Louis University and Josh McGee and Gema Zemarro of the University of Arkansas. Young teachers in particular have very little understanding of their retirement plan.
The researchers give a five-question “pop quiz” to a subsample of teachers who participate in the RAND Corporation’s American Teacher Panel survey. The questionnaire was fielded in February and March 2020, and 5,464 teachers completed it. The analysts cross-referenced teachers’ responses with the retirement plans of their respective states to check the answers. Respondents from a few states, including Ohio, were dropped because their state offers a choice of retirement plans; thus, linking a teacher to a singular plan wasn’t feasible.
The topics and results of the survey are as follows:
- Retirement plan type: Teachers were asked to identify the type of plan in which they participate based on a short description (though a label is omitted). The four options were a traditional pension, 401(k)-style defined contribution, cash balance, or hybrid plan. Just 56 percent of respondents correctly identified the type of plan they were enrolled in. The vast majority of U.S. teachers are enrolled in a traditional pension, and those answering this way were overwhelmingly correct. Yet nearly half the respondents picked one of the other three models and were almost always wrong.
- Retirement age: Teachers were asked about the age at which they become eligible for full retirement benefits. Just one in five got the age correct, while 34 percent were able to identify the age plus or minus one year (that number includes those who got it spot on).
- Social security: In some states, teachers do not participate in social security. The good news is that a large majority of teachers correctly identified whether they participate in the program (86 percent). However, the study reports much confusion about who contributes to social security. Among teachers covered by social security, 40 percent correctly responded that both they and their employer pay into the system.
- Benefit duration: In a multiple-choice question, teachers were asked how long they’ll receive retirement benefits: “as long as I live,” “for a fixed time,” “until the money runs out,” or “other.” Teachers generally fared well on this question, with 68 percent answering correctly. This is likely a reflection of most teachers being in a traditional pension plan, which has the well-known (and much-hyped) feature of promising a lifetime annuity.
- Contribution rates: Teachers struggled most to identify the percentages of salary that they and their employer contribute to retirement benefits (excluding social security). On the employee side, only 2 percent accurately stated their own contribution rate—i.e., the amount deducted from their paychecks for retirement. Less than a quarter got the employee rate within one percentage point. As for the employer rate, no teacher correctly stated the rate, and just 15 percent came within one point of it. That said, to answer the employer rate correctly, teachers had to identify the fraction of an employer’s contribution dedicated to normal costs—the percentage that is prefunding a teacher’s benefits (as opposed to paying down unfunded liabilities). Because many states have large unfunded liabilities, it’s likely a real challenge to keep track of the normal cost of an employer’s contribution. So this one was a little tricky.
Predictably, given their closer proximity to retirement, experienced teachers were more likely to answer correctly than younger ones. For instance, 63 percent of late-career teachers accurately identified their retirement-plan type, versus 50 percent of early-career teachers. On the benefit-duration question, 81 percent of late-career teachers answered correctly, while fewer early-career teachers got it right (55 percent).
Teachers have lots on their plates and probably aren’t poring over the minutiae of their retirement plans. And haziness about retirement plans isn’t limited to the teaching profession, either, as workers in other career fields also struggle to comprehend the rules and terms of their plans. But what’s apparent from this study is that teachers, especially younger ones, could use better information about their retirement plans—and their options, if such are available. With clear information, teachers should be able to better plan their futures.
Source: Dillon Fuchsman, Josh B. McGee, and Gema Zamarro, Teachers’ Knowledge and Preparedness for Retirement: Results from a Nationally Representative Teacher Survey, Sinquefield Center for Applied Economic Research Working Paper (January 20, 2022).