How do teacher pension plans typically work?

Teacher pension plans help teachers plan for retirement. These plans are usually set up by state or region, depending on the where the teacher lives. While many professional employees on a retirement plan through their employer save for the future on a 401(k) plan, the majority of public school teachers have set up defined-benefit contribution plans.

The defined-benefit contribution plan takes into consideration the number of years a teacher has worked and his or her salary. Other factors involved include life expectancy and investment income. Sometimes, the employer will contribute to the retirement fund so that teachers don’t have to pay taxes on that amount. The state can also contribute the difference, if the teacher isn’t required to make any contributions. Many public school teachers still work with the 30/55 retirement plan, which means that after putting in 30 years of service, they get to receive benefits at the age of 55. According to the National Conference of State Legislatures, defined-benefit plans are "said to be funded when [their] current assets plus reasonable estimates of future investment earnings and contributions will equal its obligations." Equities are now more widely used for investment instead of bonds, since equities are generally more profitable. Once a teacher is allowed to start receiving benefits, he or she can choose to receive payments as annuities or make withdrawals, depending on the particular plan. Teachers cannot receive the same salary amount from when they were working as their annuity, but they can receive up to 50%-60% of their final salary.

Some public school systems are also starting to work with the defined-contribution plan, which is more similar to retirement plans in the private sector. These plans rely more heavily on the employer as a contributor, who either matches what the employee pays or commits to contributing a set amount or percentage independent of what the employee sets aside, if anything. Some argue that this system is more secure, as the amount pledged for retirement is backed up by the Pension Benefit Guaranty Corporation, in case there was an error in budgeting. The defined-benefit plan currently has no back up system.

One of the largest teacher pension plans is the Ontario Teachers’ Pension Plan, which currently boasts over $108 billion in net assets. This independent organization invests its assets in order to deliver pensions to retired teachers.

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