Some time in the near future, Governor Christie is going to propose legislation to increase teacher contributions to health benefits beyond 1.5% to a percentage of premiums. These revised contribution rates would apply to all teachers who do not retire at the end of the year. Any teacher who retires after the legislation goes into effect would have to pay health care premiums after retirement.
The legislation will seek not only to require that employees share in the rising cost of health care, but also to encourage veteran teachers to retire. These retirements would presumably help school districts avoid layoffs, but Christie’s Education Commissioner Bret Schundler thinks that retirements will exceed the districts’ targets for job reduction.
This way, a school district will have the opportunity to hire new employees who are less expensive. It will help immediately in fiscal year 11 (2010-11).
On that one point, at least, administration and union officials agree. On Thursday, the NJEA issued a press release warning that 30,000 of the state’s teachers could retire at the end of the year if the legislation passes into law. The parties disagreed, however, on the fiscal impact of the proposed legislation. In the press release, NJEA President Barbara Keshishian warned that the proposal “could jeopardize the immediate health of the entire pension system” by moving thousands of teachers into the pension system years earlier than expected. This added strain on the pension system would force the state actuary to increase the contribution rate for school districts.
So who’s right here?
The following table assumes a teacher begins working at age 28 with a salary of $48,000, works to at least age 55, is female with probability 2/3, and receives step increases of 1% after each of the first five years, 4% after each year in the next five years, and 8% after each year in the next five years. Employee contributions to pension fund are accounted for by reducing each year’s salary by 5.5%. These estimates does not include annual raises or cost of living adjustments, so provided that these mirror inflation, the dollar amounts can be interpreted as inflation adjusted to the year of hiring. Survivor benefits are not considered. I used the SSA’s actuarial life table in producing these estimates.
Each year earlier this teacher retires would mean a 1% increase in lifetime salary+pension per years of service. A teacher working until age 61 (the average retirement age for teachers) would earn $456,000 more than one working just to age 55. That is about $76,000 per year for the last six years of service. By comparison, a teacher retiring at 55 will make $114,000 per year of service over a lifetime. To break even with this kind of early retirement program, one of every three vacated positions must be left unfilled. And that’s before we consider the cost of putting another employee on the state health benefits plan.