Are California Teachers Better off with a Pension or a 401(k)?

Source: Nari Rhee and William B. Fornia, University of California – Berkeley, Institute for Research on Labor and Employment, Center for Labor Research and Education, February 2016

Pensions form a significant part of public school teacher compensation, and provide the primary source of retirement security for teachers, many of whom are not included in Social Security. While most private sector employers have shifted the retirement benefit costs and risks to employees by switching to 401(k) style plans, most public school teachers are still covered by defined benefit pensions that provide guaranteed retirement income and reward long service. While 401(k) plans have the advantage of portability for a mobile workforce, defined benefit pensions provide greater retirement income security and reduce turnover. Given the role of retirement benefits in meeting both employer goals for workforce retention and employee goals for retirement income security, this study examines the suitability of defined benefit pensions for California teachers compared to alternative retirement benefits.

Overall, we find that the CalSTRS pension benefit structure—which is designed to reward teachers who stay until at least early retirement age—is better matched to the needs of the active teaching workforce than 401(k) or cash balance plans. Although early career turnover is high, most of the teachers that a student will have during their K–12 education journey in California will have served 20 to 30 years or more before they leave public education in the state. Thus, the vast majority of the educators currently serving in California public schools can expect to collect pension benefits under CalSTRS that are superior in value and security to what they could receive under an ideal 401(k)-style plan. The CalSTRS pension system also offers significantly higher benefits compared to a generously modeled cash balance plan for a large majority of active teachers. Ultimately, switching to an account-based retirement system—such as a 401(k) or cash balance plan—would sharply reduce the retirement income security of teachers who account for a large majority of educational labor in California.
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