The Long-Term Solvency of Teacher Pension Plans: How We Got to Now and Prospects for Recovery

Abstract

The COVID-related financial market decline and economic recession have raised new concerns regarding the financial sustainability of retirement plans for state and local government employees, the largest group of whom is public school teachers. Using data from the Public Plans Database and the National Income and Product Accounts, I analyze teacher pension plans over the 2001–2019 period, seeking to answer questions regarding teacher pensions’ funded status, investment decisions and returns, adequacy of contributions, and generosity of benefits. These data show that teacher pension funding peaked at the beginning of the 2001–2019 period due to the tech bubble’s inflation of asset values, but then it declined thereafter due to investment returns that significantly underperformed assumptions, failures by sponsoring governments to consistently make full contributions, and increases in the generosity of pension benefits. School districts will face substantial funding challenges in the post-COVID period, as investment losses are factored into contribution rates, government revenues available to make contributions shrink, and education funding from state governments comes under pressure. I outline several policy alternatives that policymakers may consider, but none would make restoring teacher pensions to full funding a painless process.