A wave of teacher retirements could impact pension funds
Teacher pension funds could be faced with a perfect storm if a wave of teacher retirements occur because of the COVID-19 pandemic.
“It might affect retirement benefits, because if people retire early then pension funds will have to come up with the cash to pay them, which also might result in higher contributions,” said Dan Doonan, executive director of the National Institute on Retirement Security, who spoke on a Friday webinar organized by the institute.
The California State Teachers’ Retirement System has 450,000 active teachers, and about 100,000 are eligible to retire, said David Lamoureux, the system's deputy chief actuary for.
“If we lose membership, whether it is from deaths, or layoffs, or for whatever reason, it could have a significant impact,” Lamoureux said.
Typically, though there is turnover among teachers in the first five years, those who last beyond that time frame tend to make a career of it, often not retiring until their late 60s or early 70s, said panelists, adding the pandemic could change that. Panelists weighed not only a wave of earlier retirements, but the potential for COVID-19 disability cases and deaths as teachers return to the classroom in many states without the pandemic being under any semblance of control.
CalSTRS also has 50,000 teachers age 60 and above, and if they decided to retire, that would result in twice as many as the highest number of retirements the system has experienced in a single year, Lamoureux said.
In order to model the risk to the retirement system, CalSTRS has looked at what occurred during the last two recessions in the U.S., first the dot.com bubble in 2001 and the financial crisis of 2008, Lamoureux said. The modeling showed in the event of another recession on the level of the financial crisis of 2008, CalSTRS would only be 71% funded in 2026.
Under the modeling, CalSTRS could survive another recession like the dot.com bubble, but it the funding plan would not work if the current economic shock turns out to be as severe as the 2008 financial crisis, Lamoureux said.
CalSTRS currently is on a path to be 99.9% funded by 2046, but that assumes a 7% return every year and 3.5% payroll growth, Lamoureux said. CalSTRS collects money from the employer, teachers and the state. The employers pay two-thirds of the unfunded liability, and the state pays one-third of the UL.
As of June 30, 2018, the CalSTRS was 64 percent funded, and the unfunded actuarial obligation was $107.2 billion, according to a report CalSTRS made to the Legislature in June 2019.
And while school districts are weighing how to deal with increased pension costs, they will also have to consider where to find replacement teachers in a profession that has experienced teacher shortages, Doonan said.
The pandemic has placed school district leaders in the situation of determining whether teachers who return to the classroom would receive “line of duty disability payments” if they contract COVID-19.
School districts are weighing where contracting the coronavirus would be considered a disability that is automatic, but it’s difficult to make decisions when it’s unclear what long-term health effects people who survive the virus could have, said Rocky Joyner, a senior vice president and actuary in the Atlanta office of Segal, a benefits, compensation and human resources consulting firm.
“At this point, it’s not clear where we go,” Joyner said. “We know short-term that COVID-19 is causing more deaths than expected, so 2020 is not looking to be a good year. But once we get the vaccine and protocol, will people who survive end living longer, because of improved sanitation and cleanliness? Those are the things, we are trying to get a handle on."
The other question is whether the number of teachers who end up retiring early on long-term disability will grow because teachers fall ill from COVID-19.
“It’s not clear,” Joyner said. “Questions, not just of mortality need to be considered, because it doesn’t behave just like the flu, not everyone gets better, there are often respiratory issues. This is a different kind of disease.”
Some states have gone in the other direction, adopting laws that limit the liability for companies, rather than installing worker protections, Doonan said.