PSERS – How are benefits earned?

My series on the Public School Employees Retirement System continues.  See previous posts 1.  PSERS – an emerging problem

2.  What is PSERS?

Before we examine contribution rates, let’s examine the benefit formula.   Once an employee is vested in the PSER system, a formula determines the lifetime annuity amount.

The formula is:

PSERS FormulaYou will notice that the PSERs multiplier is either 2.0% or 2.5%. This is because PSERS actually has multiple classes of participants. In 2001 and again in 2011 changes were made to key program levers, such as vesting, contribution rates, and risk-sharing provisions. So employees with lower contribution rates / lower risk sharing have the lower multiplier, and employees with higher contribution rates / more risk sharing have the higher multiplier. (I am simplifying this, so if you are interested in the six classes of employees, please see the PSERS member handbook, p. 4 found here.)

So let’s work through an example.   Consider a teacher in UCFSD who begins teaching out of college at age 22, works 43 years until age 65, and completes zero additional education during employment (no masters degree, no other certified coursework).  What monthly income would this teacher receive in retirement?   43 years X 2.0% multiplier x $75,515  =  almost $65,000. If the teacher were in a plan class with a 2.5% multiplier, the final salary would be 107% of final salary … more than was earned during the final years of employment!   So once 40 years of service is achieved, there is no financial incentive to keep teaching.  This surprised me!

Most of our long-term teachers in the district do obtain masters degrees and complete additional coursework, which qualifies them for higher base pay.   So let’s run an example at the top end of the scale.   Let’s look at a teacher with 43 years of service with a master’s degree + 60 additional college credits. The final salary is $102,471. This yields a lifetime annuity at retirement of $88,125 (2.0% multiplier) or almost $110,000 with the 2.5% multiplier.

What is the value of this lifetime benefit?   How does it compare to a 401(k) balance in the private sector?   We can compute this using actuarial tables for single premium fixed annuities. For a 65-year-old male starting lifetime payments at age 65, the value of a $1 monthly annuity is $166. So the value of a $65,000 annual annuity is $65,000 / 12 * 166 = $900,000.   (The multiplier of 166 is dependent on mortality tables and returns on the investment portfolio). For our high-end example, the present value of the annuity is $1.5 million!   Or for a teacher who later achieves a senior position in administration (principal, director, superintendent), pension benefits could top $2M.  Figures for females, who live longer on average, would be a bit higher.

Key Takeaways:

  • When considering teacher and administrator compensation, we must consider the value of pension benefits that are earned.   This benefit is rare in the private sector, and is a very material component of teacher compensation.
  • Teachers and administrators who work a full career in education will have the same income in retirement as they do during employment.
  • At career end, the pension benefit means there is little financial incentive to continue teaching (of course many continue to teach because they love teaching)