- Assumed Rate of Return
- Myth: The Assumed Rate of Return Determines the Value of Your Benefits
- Quick Recap: Normal Cost
- Unfunded Liabilities
- Amortization Payments
- Funded Ratios
- Myth: It Is Okay For a Pension Plan to Target Less than 100% Funding
- Actuarially Determined Contribution (ADC)
- Myth: More Teachers are Needed to Ensure Pension Debt Gets Paid Off
- Myth: Pension Funds Don't Need to Contribute the Full ADC
- Quick Recap: Unfunded Liabilities
- Governance: Who is in Charge of Pension Funds?
- States Running Healthy Teacher Pensions
Myth: More Teachers are Needed to Ensure Pension Debt Gets Paid Off
Fact: Teacher contributions typically only go toward the cost of their own benefits. Other than Arizona and Ohio, teachers don’t make pension debt contributions, so money from future teachers is not necessary. Remember, pension benefits you earn each year are intended to be funded in advance with contributions that will then earn investment returns.
Many believe that that pension fund finances work like Social Security, with current contributions from teachers paying for current retiree benefits.
In pensions, however, your contributions typically only go toward the “normal cost”—the total contributions needed to pay for the pensions earned each year. (Arizona and Ohio are the major exceptions to this rule.) By federal law, your retirement system has to refund the value of your total contributions if you leave a pension plan before retirement, should you request it. If your contributions were spent on debt payments that wouldn’t be possible.
This is an important distinction. For example, if the normal cost of your pension were 10% of payroll, and the pension system required employees to make contributions equal to 6% of their payroll, then those employee contributions go toward the normal cost of your own benefits and your employer pays the other 4% of normal cost contributions plus any pension debt payments.
This arrangement—teacher contributions going toward normal costs—means that if a state legislature or city government wants to create a new retirement plan for future employees, it should be able to without jeopardizing the benefits of current retirees. Current teachers only contribute to their own benefits in a defined benefit pension plan, so contributions from future teachers aren’t necessary to cover costs when they retire.