Teachers are often underpaid, underappreciated, and underfunded. Most teachers take the job knowing they’ll be paid less but are usually compensated with a pension plan. It’s similar to the Social Security program—a certain amount per pay check is automatically deducted for the pension. Most public-school teachers don’t pay Social Security taxes and won’t get the benefits in retirement. Many teachers rely on their pensions for an affordable retirement. A common misconception is that the pension program is similar to a 401(k) or IRA, which would be incorrect. The problem of underfunding is nothing new and the government is aware. The State Treasurer of Connecticut, Denise Nappier, explained that the “Teacher’s Retirement System has had a funding problem for decades.”1

What is Causing the Underfunding

Why are your pensions being underfunded? There are tons of reasons: market crashes, unexpected costs, maybe even lack of planning. The main cause of underfunding is state and government spending more than their budget allows. In turn, they decide to take from the future pension budget in order to pay the current pension debt. Most states push the pension debt to the current teachers who are contributing so they have a steady stream of money to pay the debt.

Why Should You Care?

Whether you’re a teacher/public employee or not, this concerns you. If a state cannot figure out how to manage their budget and pay the pensions, they’ll need a state or government bailout, which will affect everyone in the country. This can affect several aspects of the economy including the stock market, state and federal budget, real estate, and more.

Those who took public employee jobs that don’t pay very well are relying on the promise of their pension for guaranteed income after retirement—something we can all relate to.  Many of these employees may have even foregone retirement savings account because of the pension promise.  Some states such as New York and Wisconsin have much less underfunding than New Jersey and Kentucky. If a handful of these public employees decide to move, it can potentially create huge loss of revenue and only worsen the problem, but can you blame them? With lack of integrity from their employers and their money on the line, what’s stopping them?

What’s Being Done

Michigan is one of the first states to tackle the ongoing teacher pension problem. In the 1990s, Michigan decided to be proactive and begin offering a generous 401(k) plans to new employees. Michigan also lowered the plan discount rate to reflect low returns so that the government is forced to add more money instead of relying on bonds and stocks.  This also predicts a realistic pension amount.

On the other hand, Connecticut is considering transferring its inventory of property assets to the pension fund. State Treasurer, Denise Nappier suggests the state uses $1.5 billion of its lottery-backed revenue bonds as well. Lowering the discount rate to a realistic one and adding more steady and tangible contributions are a few ways to reduce stop the underfunding of pensions. The first step towards total reform and justice is creating a discussion.

What You Can Do

Raising awareness on the issue can bring change. The United States was built on the public rallying for and demanding change. Consider participating in city and state meetings to ask questions about your pension and demand answers. You can also write your senates, representatives, and even your state treasurer. Unfortunately, change takes a lot of time and effort and you may not have both available. Think about alternative retirement plans such as 403(b), IRAs, or annuities. Speak to a qualified financial professional to go over your options based on your age, risk tolerance, lifestyle, and retirement goals. If we’ve learned anything from America’s financial history, hope for the best but prepare for the worst.