What Is a Teachers' Pension?

A teachers' pension is a retirement scheme often available to public school teachers in many regions. In order to attract people to the teaching system, many governments and school systems offer a generous teachers' pension program that includes employer and government contributions, as well as contributions made by the teachers themselves. With fallout created by the financial crisis of 2008, considerable debate has been raised over the fairness of teachers' pension plans, many of which are drastically underfunded by the government.

Working as a teacher is a difficult job that requires considerable education. Primary and secondary school teachers rarely have opportunities to advance in terms of their careers; those that remain teachers throughout a long career do so knowing they are unlikely to achieve fame and fortune. Since education is considered a vital element to the preservation of a successful nature, governments have long sought ways to draw talented, educated adults to the teaching profession. Creating a high-contribution pension plan is one of the ways many governments attempt to bring new teachers into the system, and retain teachers already working at schools.

Teachers' pension operates similarly to a private retirement plan, such as a 401(k), but is a distinct system. One of the key differences is that many teachers' pension schemes operate on a defined-benefit, rather than investment-based return system. With a 401(k) plan, returns are highly variable based on the performance of the investment market. A defined-benefit teachers' pension, by contrast, means that teachers are guaranteed a return based on their years of service, level of income, age at retirement, and life expectancy. If the market performs poorly, this means that the pension can become dangerously underfunded, since actual return rates can end up far lower than the promised rate of return.

When retiring, employees with a teachers' pension plan become eligible to receive monthly benefits or make variable withdrawals from their fund. Though monthly benefits are usually far less than the teacher's working salary, they may still provide a livable income for retirement. Under many plans, teachers may retire from work as early as age 55, provided they have given at least 30 years of service.

The controversy over teachers' pensions largely revolves around the guaranteed rate of returns and growth in the education industry. As the population grows, more teachers become necessary, meaning that the amount of money paid to teachers' pension plans can rise well above funding levels. Added to a faltering financial market, this can lead to massive shortfalls between guaranteed pension levels and available funds. While some pundits and economists argue that pensions need to be dramatically reduced, detractors argue that education is a fundamental requirement of a flourishing economy, and that it should be one of the last areas to face economic cuts.