Illogical incentives and unfair penalties skew Colorado’s teacher retirement system

If public school teachers and other beneficiaries stay in the same system throughout their entire career, PERA provides healthy retirement benefits.

But today’s workforce is increasingly mobile and likely to switch jobs – and even careers – multiple times.

In fact, according to the state’s assumptions, 64 percent of educators work fewer than five years for Colorado school districts. These workers leave the state’s system without accruing any employer-funded retirement benefits if they choose to withdraw their funds.

And unfortunately, the state’s current benefits package fails to reward teachers consistently throughout their careers.

To illustrate the impact on public servants’ retirement security, we offer some specific scenarios. While the public servants described are fictional, the calculations use real data and assumptions to illustrate actual benefits in each scenario.

Here are the stories of those losing out as a result of the current system:

Teaching was Michelle’s first job out of college but, after nine years in Colorado classrooms, she’s decided to transition to the private sector. Michelle and the school district have been paying into PERA but, if she never returns to public service, her PERA benefits will be limited when she reaches retirement age.  See how much Michelle is losing out on >>

Tina dedicates her entire career to teaching but, after a decade in Colorado classrooms, her husband gets a job in Chicago. Tina teaches for the rest of her career in Chicago public schools but, because her career spans two states, her combined pension benefit is far less than if she had worked in either state the whole time.  See how much Tina is losing out on >>

After teaching middle school for 20 years, Barbara is burned out and wants to change careers.  Yet under PERA’s current structure, her benefits will quadruple if she stays in the classroom another 10 years. Under a smooth accrual system, her benefits would increase more steadily throughout her tenure. See how much Barbara would lose out on >>

Maria just keeps getting better in the classroom. Even though she is eligible to retire, she has more to give. But under PERA’s current structure, she loses retirement benefits every day she shows up to work. That’s because she is no longer is accruing retirement benefits and she can’t start receiving benefits until she stops working. A smooth accrual structure would allow her to keep working without this penalty. See how much Maria is losing out on >>

Faye worked hard for four years at a tough school and she made a positive impact but now she’s going to work for her family’s farm. When she leaves PERA, she will get only the money she contributed and none of the school district’s contributions, putting her behind the curve in saving for retirement. See how much Faye is losing out on >>

Nick had a huge impact as a teacher but, after eight years in the classroom, he accepted a job in the private sector. While Nick and the school district have been paying into PERA, his retirement benefits will be limited if he never returns to public service.  See how much Nick is losing out on >>

Richard got his first teaching job in Colorado but, after 11 years in the Centennial State, Richard’s wife wants to return to her home state of North Carolina. Although Richard spends the rest of his career teaching in North Carolina, his total pension is considerably less than it would have been had he taught in the same state for his entire career. See how much Richard is losing out on >>

Ron always enjoyed teaching and mentoring high school students but, after 21 years in Colorado schools, he wants to train to become a chef. However, Ron knows that if he sticks it out for nine more years at his school, his PERA benefits will increase exponentially. Ron remains in the classroom, counting down the days until he reaches his maximum benefits. See how much Ron would lose out on >>

Although Frank has been teaching for 35 years and is eligible for retirement, Frank is hitting his stride and impacting kids in ways he never expected. He would love to keep teaching, but knows that he loses retirement benefits by doing so. Frank is now forced to choose between helping future students and maximizing his retirement benefits. See how much Frank would lose out on >>

Brian enjoyed his three years as a middle school science teacher, but realized he couldn’t ignore his dream of going back to school to become a doctor. After getting accepted to medical school, Brian finds out he won’t receive any of the school district’s contribution to his PERA benefits. See how much Brian is losing out on >>

Unfortunately, the state’s public employees’ benefits structure creates many more losers than winners. Instead of accruing retirement benefits steadily over the course of their careers, PERA members – most of whom are public school teachers – earn relatively meager retirement benefits in the early and middle portions of their careers and only see their benefits spike after 25 or more years with PERA-covered employers.

The back-loaded distribution of retirement benefits penalizes those who move to or from Colorado or between the private and public sectors over their careers. And because PERA members do not have the safety net of Social Security, these inequalities may jeopardize the retirement security of many dedicated public servants.

The current benefit structure also limits the ability for schools and other public employers to offer the most competitive compensation packages to attract talented new employees while discouraging productive, committed public servants from working beyond when they become eligible for retirement.

But what does this mean to specific public servants? To illustrate the impact on their bottom lines, we offer some specific scenarios. While the public servants described are fictional, the calculations are real, reflecting PERA’s actual benefit structure.

In each illustration, PERA’s current benefit structure is compared with a hypothetical “smooth accrual” retirement plan, in which employees would accrue future pension benefits at a steady rate throughout their public service careers, no matter how long they work for PERA-covered employers. In contrast, under the current state benefits structure, workers who leave the system before reaching the ramp up in benefits subsidize workers who remain long enough to receive large retirement payouts. That’s because, for those who leave early, the employer has paid more into the system than the employee ever receives in benefits. The total cost of the hypothetical smooth accrual retirement system would be the same as the current PERA structure.

In all our calculations, the contributions and benefits are based on a traditional defined-benefit retirement plan, which – like Social Security – provides a set monthly retirement benefit for life. (This traditional pension approach contrasts with defined-contribution plans like 401Ks, which are more common in the private sector and provide a lump-sum benefit at retirement.) Our calculations are presented as “present value,” meaning the value in today’s dollars of the future retirement benefits.