Trenton, to give NJ teachers a better retirement you must give them choice

New Jersey’s Teacher Pension and Annuity Fund, or TPAF, stands out as a dismal emblem of financial mismanagement, ranking among the nation’s worst-funded teachers’ pension plans with barely 40 cents in assets to cover every dollar in promised future retirement benefits.

Trenton routinely shortchanged the TPAF for years before Gov. Phil Murphy and the Legislature finally resumed budgeting the state’s full required employer contribution to the fund in 2022. But even under overly optimistic investment return scenarios, TPAF’s accumulated liabilities are so massive that taxpayers will be on the hook to backfill the pension fund with an added $3 billion to $4 billion a year for decades to come.

The TPAF isn’t just underfinanced. It’s also a bad deal for many of its intended beneficiaries, as we discuss in our Garden State policy report released last week.

Like most defined benefit pension plans, which promise a stream of retirement payments based on years worked and peak salaries, the TPAF reserves its biggest payout for career lifers—those who put in at least 30 years on school payrolls. But fewer than half of New Jersey teachers will reach that milestone. By changing professions, moving out of state, or leaving the workforce to raise a family, the majority are shortchanged.

Murphy’s Task Force on Public School Staff Shortages has acknowledged the need to attract more and better candidates for New Jersey teaching jobs. However, they have so far limited their efforts to modifying the existing TPAF plan to improve the benefits package.

Fortunately, there is a different, ready-made, and time-tested retirement model available—one that could offer prospective New Jersey teachers greater retirement flexibility in the form of portable, generously funded individual retirement savings accounts. It’s the Alternative Benefit Plan (ABP), which for decades has already been covering faculty members and administrators in New Jersey’s public colleges and universities.

Unlike the precariously funded and lopsided TPAF, the ABP is a defined contribution plan, to which the state is required by law to make consistent and on-time contributions. An ABP member’s minimum contribution toward retirement savings is 5%, compared to the TPAF’s 7.5%. For a teacher making $50,000, this would amount to $1,250 in savings in one year. Members wanting to save more for retirement also have the option of depositing more in separate, state-sponsored tax-deferred accounts.

The ABP offers expedited vesting, requiring only one year of service compared to the minimum 10 years required to vest a TPAF pension. Educators enrolled in the ABP could pursue career changes, relocation, or child-rearing timeouts without sacrificing their hard-earned retirement benefits.

Consider the example we offer in our report, a hypothetical teacher working in a typical South Jersey school district from 2011 through 2020 before leaving to take another job outside the education system. Enrolled in TPAF, she could walk away with only the $32,000 she contributed to the fund herself over those seven years. But if had she been able to sign up for the ABP, her nest egg of combined employer and employee contributions would have been nearly $67,000, based on actual returns realized during that period by one of ABP’s popular investment funds.

In addition to providing a better nest egg to mobile professionals, the ABP provides a suite of benefits that are bettered aligned with the needs and preferences of many recent college graduates, as well as professionals in other occupations whose talents would be welcomed in New Jersey schools. These include a choice of investment fund managers and customizable payment options, such as annuities resembling traditional pension payments or cash payments. Unlike the rigidly structured TPAF, the ABP also allows members to bequeath their entire retirement savings to beneficiaries in case of the members’ death before retirement.

The experience of other states offering similar defined-contribution plans indicates that a well-funded option such as APB would be attractive to a significant percentage of new teachers. There’s even a precedent in New Jersey with our elected officials and gubernatorial appointees who have been enrolled in a separate defined contribution plan since 2007.

The ABP offers a lifeline to New Jersey schools—a flexible, portable, and sustainable alternative that can attract new candidates to address a teacher shortage in New Jersey without adding to existing teacher pension liabilities.

Danielle Zanzalari is an assistant professor of economics at Seton Hall University and a Garden State Initiative contributor. She frequently researches bank regulation and public finance. E.J. McMahon is an adjunct fellow for the Manhattan Institute of Policy Research.