Pension Flexibility: Idaho

Analysis of Idaho's policies

Idaho only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is not fully portable, does not vest until year five and does not provide any employer contribution for teachers who choose to withdraw their account balances when leaving the system. It also limits flexibility by restricting the ability to purchase years of service. However, the state is commended for offering a fully portable supplemental savings plan.

Teachers in Idaho also participate in Social Security, so they must contribute to the state's defined benefit plan in addition to Social Security. Although retirement savings in addition to Social Security are good and necessary for most individuals, the state's policy results in mandated contributions to two inflexible plans, rather than permitting teachers options for their state-provided savings plans.

Vesting in a defined benefit plan guarantees a teacher's eligibility to receive lifetime monthly benefit payments at retirement age. Nonvested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Idaho's vesting at five years of service limits the options of teachers who leave the system prior to this point.

Teachers in Idaho who choose to withdraw their contributions upon leaving only receive their own contributions plus interest. This means that those who withdraw their funds accrue no benefits beyond what they might have earned had they simply put their contributions in basic savings accounts. Further, teachers who remain in the field of education but enter another pension plan (such as in another state) will find it difficult to purchase the time equivalent to their prior employment in the new system because they are not entitled to any employer contribution. Idaho limits teachers' flexibility to purchase years of service. 

The ability to purchase time is important because defined benefit plans' retirement eligibility and benefit payments are often tied to the number of years a teacher has worked. Idaho's plan allows teachers to purchase four years of service total for any reason, which is very limited compared to most states. This provision disadvantages teachers who move to Idaho with more than four years of teaching experience and teachers who need to take more than four years' leave over the course of their careers for personal reasons such as maternity or paternity care.  

Idaho is commended for offering a fully portable supplemental savings plan, known as the Choice 401(k) Plan, and for encouraging their teachers to participate. This plan is funded by voluntary contributions made by teachers, gain-sharing distributions, possible employer contributions and the earnings on those funds. 

Citation

Public Employee Retirement System of Idaho Member Handbook, July 2010 http://www.persi.state.id.us/handbook/PERSI_Member_Handbook.pdf

Recommendations for Idaho

Offer teachers a pension plan that is fully portable, flexible and fair.
Idaho should offer teachers for their mandatory pension plan the option of either a defined contribution plan or a fully portable defined benefit plan, such as a cash balance plan. A well-structured defined benefit plan could be a suitable option among multiple plans. However, as the sole option, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because teachers in Idaho participate in Social Security, they are required to contribute to two defined benefit-style plans.

Increase the portability of its defined benefit plan
If Idaho maintains its defined benefit plan, it should allow teachers that leave the system to withdraw employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience upon the first day of employment, allow the purchase of parental leaves and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force. 

Offer an employer contribution to the supplemental retirement savings plan.
While Idaho at least offers teachers the option of a supplemental defined contribution savings plan, this option would be more meaningful if the state required employers also to contribute. 

State response to our analysis

Idaho reiterated that while the PERSI base plan is the primary retirement tool for all Idaho teachers, PERSI also provides a supplemental option through the Choice Plan. Districts may also offer supplemental 403(b) plans. District employers are not required to pay into the Choice Plans but do have the option to make contributions to the Choice Plan. If members take advantage of their supplemental options, PERSI believes that they can achieve a very secure retirement.

Idaho added that while the PERSI plan (DB plan) is not entirely portable (members can withdraw their funds plus earned returns on their investments should they leave the system), vested members who leave a PERSI employment and leave their funds in PERSI will likely receive a retirement benefit at the time of retirement which would exceed a benefit they could earn in a 401(k) had they withdrawn their contributions and moved them to a 401(k).

Idaho asserted that the PERSI benefit is entirely portable between Idaho districts a teacher can freely move from one district to another without any impact on the PERSI benefit. Teachers can also move to any other PERSI employer (there are over 740 in the state) without any impact on the PERSI benefit. Teachers who take sabbaticals can return to the workforce and easily restart accruing a benefit.

Finally, the state noted that it has an average a 9.25 percent annual return over the last 25 years. Individuals making their own 401(k) decisions have averaged around 2 percent.

Last word

While the Choice Plan and possible supplemental 403(b) plans are laudable, NCTQ maintains that teachers should have the option of a fully portable, fair and flexible plan as their primary pension plan.

It is difficult to say that teachers would likely receive greater benefits by leaving their funds in the system. It will vary greatly depending on the teacher's age, years of service and other investment options. A teacher that leaves the system at a relatively young age, yet gave several years of service, would have a sizable amount contributed if employer contributions are considered. Teachers' monthly benefits will be greatly eroded by inflation because the salaries used in calculations may be 20 to 30 years old by the time they are used in benefit calculations.  If teachers were able to withdraw employer contributions along with their own, they may be able to purchase service with their next employer where their final average salary is likely to be much higher (due to inflation and great years of service), or they may be to able to invest the money and accrue earnings greater than their prospective pension wealth.

Being able to continue membership within the state of Idaho is valuable, but despite the variety of employers participating in PERSI within the state, it still does not aid educators who move out of the state.

The state did not provide evidence to support its assertion that individual investors earned returns of just 2 percent over the last 25 years.  The average return for the S&P 500, reflecting investments the individual investor may be likely to pursue, was approximately 7 percent, adjusted for inflation.