Planning for Potential Shortfalls in Pensions and Social Security

Pensions and Social Security may not fully fund your retirement. Plan now for ways to give yourself more control over your future financial security.

Senior Couple Reviewing Finances Together

by NEA Member Benefits

Key takeaways

  • Many educator pensions are underfunded and may not provide the benefits you were counting on.
  • Social Security may only replace about 30 to 40 percent of your pre-retirement income, at best.
  • Personal savings can help reduce your retirement income shortfall and provide greater security.

How secure are your pension plan benefits?

In the private sector, traditional pension plans are disappearing and employees are assuming personal responsibility for their retirement planning through workplace 401(k) plans. Many educators are finding themselves in the same boat, due in part to the deteriorating financial health of their state pensions.

According to a 2016 study by the National Council on Teacher Quality, a non-partisan research and policy group committed to restructuring the teaching profession, and EducationCounsel, an education consulting firm, just seven states have teacher pension systems that are well funded (funded at 90% or higher). This means most plans may not be able to meet the payout promises made to current educators. There are many complex reasons for this, but like any debt problem, it comes down to lower state revenues coupled with higher expenses, all made worse by pension plan investment returns that come in lower than overly optimistic projections.

EducationCounsel’s Sandi Jacobs stated, “This report documents the ways that optimistic projections, willful ignorance, and continued deferral of consequences hang like a fog over the teacher pension policy landscape. At this point, state teacher pensions won’t turn around with just a few good years on Wall Street. The crisis can’t be solved without intentional action by policymakers.”

States face tough decisions in an effort to shore up their public educator pensions, including:

  • Raising taxes
  • Increasing teacher pension contributions
  • Reducing benefits for new educators and/or current teachers
  • Lengthening pension vesting requirements, or raising the retirement age, or both

Will Social Security take up the slack?

From its inception back in the 1930s, Social Security has always been a safety net to help keep retirees out of poverty. It was never intended to be anyone’s sole source of income. Today, lower-paid eligible workers can expect Social Security to replace about 40 percent of their pre-retirement income. The higher your average salary, the less Social Security will replace.

Educators face other Social Security benefit reduction issues. If you previously paid into Social Security in a private sector job, you may lose a lot of those benefits due to the Windfall Elimination Provision. And 15 states don’t provide any Social Security coverage for educators.*

Put your personal savings to work

Clearly, underfunded pensions and reduced or non-existent Social Security benefits are not going to fund your dream retirement lifestyle. That’s particularly true if your income needs to last 20 to 30 years or more and cover unexpected expenses and rising healthcare costs. You need to take control and start saving your own money. 

The lesson here is to plan as though your pension and Social Security benefits might not be as rich as you thought and take a proactive role in creating a personal retirement strategy. Here are a few things you can do to get started:

*The 15 states that do not provide Social Security are: Alaska, California, Colorado, Connecticut, Georgia (some school districts), Illinois, Kentucky, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio, Rhode Island (some school districts) and Texas.

Take control of your retirement planning