I’ve worked with teachers who accepted a buyout. A new teacher always struggles a bit the first year on the job, but their students are STILL better off than with an embittered veteran who is simply hanging on for the pension (and calling in sick a dozen times a year). And by the second or third year, a good young teacher will be doing pretty well.

There is value to having some veterans around the department (we hired a couple for balance when all of the originals were retiring en masse), but teaching effectiveness doesn’t substantially improve beyond the fifth year on the job. After that point it is simply a question of how much energy the teacher has to give her students.

I have mixed feelings about public education these days. It isn’t nearly as bad as people seem to believe, at least not in the suburbs, but without public support it struggles to survive. Unions can negotiate salaries and benefits — but they can’t negotiate other critical factors such as staffing levels or supply budgets (ever try feeding newsprint through a copier because the school ran out of white paper in the middle of May?). It would be hilarious if it weren’t so sad.

My buyout plan would offer two alternatives:
(1) Accumulated contributions compounded at an 8.25% rate.
–or–
(2) A pension at retirement as promised (a percentage of the three highest years, based on the age at retirement) but with no further accumulation of “creditable service”.

The former would be more than fair for anybody with less than 20 years in the system, while the latter would mean that teachers in their 50s and 60s (of which there aren’t many right now) aren’t losing too much.

“I’d like to live in a world where great teachers made 100k decent teachers made 50k and crappy teachers were fired for non-performance…”

I worked in a district where both great and decent teachers made $50k (or less, since most of the department was young) and crappy teachers were fired for non-performance. The schools aren’t truly as much of a disaster as people pretend — for the most part they reflect the traits of the community they serve.

http://www.pressherald.com/news/maine-Po rtland-schools-retirement-incentive-dead line.html

The towns love it because they can retain the younger cheaper teachers earning 40k and lose the older more expierenced teachers earning 55-65k. In the current system those older teachers cannot be fired unless charged with a felony. Paying them to retire early saves the towns money in year one.

As a parent of 2 I hate the idea of turning teaching into an annual bidding to find the low cost providers… that is a road to socital ruin…

At the same time if someone would rather accept 20k to not teach than 65k to teach… I’ll take my chances and place the fate of my childrens future into the hands of the untested 25 year old right of of grad school.

The only moral outrage I have is when I see people who know they are accountable to no one act that way. From everything you’ve ever posted TFF I know that you are as against that kind of system as I am.

Best hopes for more funding rather than less in public education and also for better management of those dollars.

See GM Senior Secured bondholders roughly 25% recovery vs Union benifits trust (junior to the bondholders) roughly 55% recovery.

See Also WaMu secured bonds holders partial recovery vs unsecured depositors (junior) full recovery. Contract law has taken it pretty hard on the chin the last few years. (To be clear I agree that’s bad thing.)

“The state OWES exactly what it has promised to pay.” Here we agree fully TFF. Give the teachers their money god knows most have earned it…. some many times over. Issue billions of dollars of bonds while you still can and buy out the teachers at the rate of return assumed by the plan.

That rate cuts two ways. If I owe you a million dollars at 62 (your claimed 80% income replacement age based on a 70k sallary) than at 61 I owe you 917,500- 1 year of service credit. At 60 I owe you 841,806- 2 years of service credit and so on. I still owe a 47 year old teacher real money but no where near the million bucks I’ll owe them in 13 years.

That’s why pension plans were so easy to tear down in the corporate sector… ERISA entitles employes only to what they actually earned. If you’ve got 20 years in I only owe you half a pension and I owe it to you in 20 years so I can discount it back for 20 years and give you that number to roll into your 401k type plan. Then it’s up to you to contribute 11% of your sallary the next 20 years and earn 8.25% on all of it like clockwork until you hit retirement age.

I’d like to live in a world where great teachers made 100k decent teachers made 50k and crappy teachers were fired for non-performance…

But they represent a legal obligation to those currently enrolled. At the very least, those contributors are owed the actuarial value of their present status in the plan. For those with 20+ years in the system, you can’t reasonably kick them out. For those with less, you’re going to owe them a hefty buyout (e.g. 8.5% annual return on their personal contributions to the plan).

The state OWES exactly what it has promised to pay. Go ahead and change the rules in negotiating the next contract. PLEASE change the rules. But you surely are not willing to set aside centuries of contract law, are you?

The sense of entitlement of some of the union workers, that the state owes them a livelihood, is simply an embarrassment. They have no toughness.

Under the system at the time I was hired, a teacher who begins at the age of 25 could retire after 30 years of service (at the age of 55) with a 45% pension. They would not qualify for the maximum 80% pension until the age of 62, after 37 years of teaching.

In 2000, the state legislature voted to adopt an improved benefit for those teachers with 30+ years of accumulated service. Under this system, the above teacher would qualify for an 80% pension at the age of 59, with just 34 years of teaching. This was a substantial increase in the benefit (25%?) because it shortened the accumulation phase by 3-4 years and extended the payout phase by a similar amount. All active teachers were allowed to join. A teacher could retire with the improved benefit the following day and would need only pay 30% of *one* year’s salary (five year’s difference between their contribution rate of 5% and the current contribution rate of 11%).

This clearly was a massive wealth transfer to the older generation of teachers, hired during the Vietnam era, who were on the verge of retirement. It was funded by a “wish and a prayer”. Or, more accurately, it was funded by the contributions of the younger generation. The Legislature knew this would be a costly provision, and voted it in anyways, then subsequently decided that it didn’t feel like paying for it.

Given the present 11% employee contribution rate, a teacher (with a Master’s degree) who begins at $38k and works up to the maximum $65k (roughly the salary scale from my old school), with an additional 3% annual increase for inflation, would contribute a total of $411k over a 35 year career. At 2% interest (what the pension fund credits employees) that increases to $543k. At 5% interest (a pretty conservative target for a pension fund) you get $871k accumulation. At 8.25% interest (what they actually use) you get $1.56M accumulation. Based on that final number, the payout rate would be 9.1% — not an impossible target for a 25-year annuity *if* you base it on an 8.25% investment return.

If returns average just 5%, then the accumulation is only 56% of that sum *and* the payout rate would need to be much lower. That is the danger.

Still, your best bet is to offer to buy out teachers based on the 8.25% target that was used originally to calculate the benefit.

Teachers ALREADY have the right to quit their jobs. You aren’t granting them anything new. Moreover, for a teacher with 15-20 years, their pension fund balances (equal to their payroll deductions plus 2% interest) are more than half of the actuarial value of their self-funded pensions (calculated at an 8.25% investment yield as the state pension board does). So it sounds to me like your “offer” is even worse than their present options. You “offer” to return **LESS** than the money that they paid into the system. Forget sharing investment returns. You aren’t even offering to return the CONTRIBUTIONS.

Now you’ve (rightly) expressed a fear that the pension fund will be unable to achieve that 8.25% target. Fine. Calculate the actuarial value of the pension based on a 5% compounded return and you’ll get a much higher figure. Offer the teachers 50% of **THAT** sum and you’ll get a few takers. Is that what you intended?

Moreover, you are letting your personal biases (feelings of “moral outrage”?) show in your insistence that teachers who accept this offer not merely leave the pension system but LEAVE TEACHING. Sure, you’ll get a few takers who would rather do something else. But (if your offer is fair) you will also get a few people like myself who can’t imagine doing anything else — but are reluctant to pay for the privilege of staying in the public schools. I still teach, both privately and in private schools. But the outrageous pension system means I could not afford to work in the public schools unless I was willing to shape my life around the pension plan.

“something close to 80% income replacement at 65″

Congratulations! You’ve just described your typical teacher retirement. There aren’t many who retire before the age of 65. Nor are there many private-sector middle managers who are forced to contribute 11% of their salary to that pension plan.

But I generally agree with your proposal. Teachers’ pensions in Massachusetts are self-funding if you assume an 8.25% return. That is the actuarial value of the promised pension. So offer teachers an “early exit”. Return their contributions, plus an 8.25% return on those contributions, and allow them the privilege of leaving the system. They can remain in the public schools, paying into Social Security, but would no longer be part of the pension system. Fair? You wouldn’t repair the deficit with this buyout, but you would prevent it from growing any larger.

1st now would be a great time to offer what financial planners cynically but accuratly call “idiot buyouts.” Ford bought out tens of thousands of its unfirable union workers for an average of something like $117,000 a peice. That worked out to less than half of the NPV of future pension obligations to those workers but many still took the quick cash and ran.

If you offer all teachers with 10 years senority a cash payment of half of the net present value of their pensions to walk away in the summer and never come back a few would. Every dollar you hand out doing that eliminates $2 dollars worth of shortfall and so it’s worth doing. An added benifit would be the 5-10% of teachers who left would obviously be ones who’s heart were no longer in the job.

2nd after you’ve got the current system reformed so that public pensions roughly equate a private middle manager retirement, (something close to 80% income replacement at 65.) Than by all means mandate full funding every year. If the pension fund falls below 95% of accrued liability than require the state to issue G.O. bonds to immediatly make up the full difference.

That system would have the state making massive investments when the market was down (buying low) because it’s market drops that make penison fund shortfalls so shocking. States would also be issuing bonds when rates were low (since the Fed always eases rates to cushion the blow of recessions.)

The public penison system could easily be reformed and structured in a way that offeres workers a valuable pension at a reasonable cost to tax payers. What cannot continue is the outcome TFF has described. Changing benifits systems on the fly is theft from workers who put in their prime working years expecting to collect what they were promised.

(2) The only portion of the pension benefit to which the employee has clear and uncontested title is the number shown on the annual statement. That consists of the employee contributions plus 2% annual interest. Anything more than that depends on the willingness of the state to honor its obligations. As y2kurtus has clearly stated, there is little or no public support for this.

(3) The voters believe they are not bound by these contracts because “somebody else” signed them. The fact that “somebody else” was a publicly elected official does not concern them. The *ONLY* factor standing between teachers and a sharply reduced pension (likely through delayed retirement) is the insistence of the Massachusetts Supreme Judicial Court that pension obligations are formal debt on par with the state bonds. And laws can be changed.

y2kurtus will enjoy a comfortable retirement because he saves and invests wisely. *I* will enjoy a comfortable retirement because I save and invest wisely. But we should pity those poor fools who hand over $5k-$8k a year of savings to the state to manage. Their contributions are being used to pay benefits to the Baby Boomers (who contributed at a MUCH lower rate). Very little will be left in 30 years when they are ready to retire.

And I look at it very differently. I see a system that charges teachers hired in the last 20 years an annual contribution sufficient to fund a $1M retirement portfolio and **MAYBE** pays the promised benefit in the future (if the politicians don’t bankrupt the system by giving all the money to the Baby Boomers).

Your “average taxpayers”, or at least the politicians they elect, are voting to confiscate $1M PER TEACHER. And you are very obviously reluctant to pay that back.

Tell me again how this is such a great benefit?

Assumptions: 70k final sallary, 80% income replacement, 55 year retirement age. Replacement immediate annuity cost = $911,100

All of those assumptions are very close to reality in my state (Maine.) If you boost the 55 retirement age to 62 the cost drops to a slightly more reasonable $785,266.

When you factor in the post retirement health benifits and inflation ajustment that some states offer these figures are on the low end. While the pale in comparison to what a bank president gets they dramaticly exceed the retirement benifits of the average taxpayer.