Volume 4 Issue 1

Millions of Dollars out of Classrooms to Fund Retirements (PERA)

by Dan Lacey

Teaching is a hard profession. Many teachers spend countless hours planning and preparing lessons, grading papers and often spend their own money to buy classroom resources. How can Jeffco recruit new teachers with starting salaries less than $39,000? Don’t we want the best and brightest in front of our children every day? How can the teaching profession compete for the best college graduates when business, engineering and many other professions pay starting salaries of over $50,000?

“Taxpayers are contributing $84 million to retirement accounts each year.”

Why then, is the take-home pay of teachers so low? In Colorado, part of the reason is the exorbitant amount employers (or taxpayers, in the case of public school staffs) put into the retirement accounts of every school employee. School employees are not part of the Social Security system; instead they are covered by the pension scheme, PERA (Public Employees Retirement Association). If school staff were part of Social Security, the employers (taxpayers) would be making about an 8 percent match to about an 8 percent contribution made by the employee (just like those of us who do not work for a public entity).

Under the PERA system, school staff contribute 8 percent to their retirement fund (similar to other’s Social Security tax contribution), while taxpayers must contribute nearly 20 percent to the PERA retirement account for each employee. In Jeffco, that means taxpayers are contributing $84 million to retirement accounts each year. That is over $50 million more than would be contributed if school staff were part of Social Security.

If that 12 percentage point difference were applied to new teacher salaries, Jeffco starting salaries would be nearly $44,000. Would that be competitive enough for more college graduates to consider entering the teaching profession?

Making matters worse for new teachers, if they leave the profession in Colorado before their fifth year of service, they receive none of the money contributed by their employer. In other words, they only get to keep the 8 percent they contributed, but none of the 20 percent put in by their employer. Data shows over 50 percent of teachers leave the profession before their fifth year, likely without realizing how much they are leaving behind.

In fact, according to the PERA Comprehensive Annual Financial Report (CAFR), projections are that 61 percent of teachers will leave the profession in the first four years. Those teachers leave without any of the 20 percent that taxpayers contributed to their retirement accounts. Those dollars stay in the PERA system to help support the retirement of those who stay in the profession and do not retire until they are 57 or 60 years old. Isn’t this a bit like a Ponzi scheme?

There are two reasons the contributions are so high. The first is the benefits promised are incredibly generous, many times higher than what Social Security pays. Some might argue that the generous retirement benefits compensate for the fact that teacher salaries are not high enough. However, those who do not wish to stay in the profession longer than five years, or those who may have to move might prefer higher take home pay. At the very least this reduces the pool of those willing to enter the teaching profession. Secondly, PERA is vastly underfunded because the benefits were calculated with the assumption that investment returns would average 7.25 percent, but the actual average annual return since 2000 is 5.2 percent.

“In Jeffco, that would mean an additional $20 million to cover benefits.”

Sadly, even these huge contributions are not enough to cover the promised benefits. The Denver Post recently ran an article which said the PERA board will propose to the legislature in January 2018 that taxpayers and school staffs contribute even more to PERA in order for there to be enough money to pay all of their retirees. They propose taxpayers pick up 2 percent more, taking the school district’s contribution to 22 percent of salaries. Staff will be asked to increase their contributions from 8 percent to 11 percent. In Jeffco, that would mean an additional $20 million dollars needed to cover benefits. Those dollars come directly from the operating budget every year. That’s $20 million that won’t go to increase teacher salaries or pay for classroom resources. Even then, the PERA board fully admits these increases may not be enough to honor the commitments to all of those currently covered by PERA.

How is any of this good for teachers, bus drivers, school nurses, or the tens of thousands of school staff who give up take-home pay early in their career in order to have guaranteed income in retirement? It certainly isn’t fair to the school staff who work fewer than four years. Shouldn’t we start figuring out how to pay new teachers a more competitive wage now and how to fix the broken retirement system without asking taxpayers to sacrifice their own retirements to higher taxes?

Editor’s note: Jeffco carries a $1.6 billion liability just to cover PERA pension debts.