Teacher Retirement Plans: Case Studies in Washington and Ohio Indicate Value of Pensions

An issue brief finds that teachers prefer a stand-alone defined benefit pension when given a choice between a pension plan or a plan that combines a defined contribution account with a pension.

This new research brief examines the experience in the only two states that have offered a defined benefit (DB) and defined contribution (DC) combination choice – Washington and Ohio. The research offers three key findings:

1.  The teacher retirement plan election pattern during 1997 in Washington is unique. The combined DB-DC plan offered by the state included special features and circumstances that enticed teachers to switch:

• Teachers were provided with an upfront financial payments in 1997 that encouraged the switch;
• Stock market conditions with double-digit gains in the1980s and 1990s may have caused teachers to overestimate the future value of their DC accounts. Thus, the combined DB-DC plan appeared more attractive in 1997; and
• The state offered important features such as in-plan annuitization of a teacher’s DC account balance, so he or she would receive guaranteed lifetime income with the state reassuming the longevity risk. In fact, this ability provides teachers with a significantly larger lifetime income than available today from annuities from insurance companies.

2. Ohio had a far different outcome than Washington over the years when teachers could choose between the DB plan and the DB-DC combination plan. Between 2002-2014, 86% of new teachers opted to join the traditional DB plan and only four percent opted for the combined plan. The remaining 10% chose the DC plan, the third option available in Ohio.

3. Education policy research finds that DB pensions play a critical role in recruiting and retaining qualified, productive teachers. Thus, offering an alternative retirement plan design could have adverse effects on teacher retention and quality.