For my doctoral dissertation at University of Central Florida (UCF), to be completed in Fall 2019 and entitled A Survey of Investing and Retirement Knowledge and Preferences of Florida Preservice Teachers, I will administer a questionnaire to undergraduate students at UCF who are studying to become teachers. The questionnaire (commonly referred to as a “survey”) asks about their financial knowledge and personal preferences related to personal finance, retirement accounts, and the Florida Retirement System (FRS), as well as financial challenges they anticipate in retirement and in funding their retirement.
Although the background information explained in my dissertation’s introduction and literature review chapters is extensive, I am writing here to explain this information along with important but ancillary points regarding teacher retirement preparedness, the FRS, pensions for public workers, and financial literacy.
Pension plans, which pay a monthly benefit in retirement, are uncommon nowadays in the private sector. Since the 1980s, they have been almost completely replaced by 401(k) or similar accounts that employees fund on their own, manage investments, and draw upon. Although employers may add “free” money to an employee’s 401(k) account (e.g., employer matching contribution), employers do not have to worry about paying an employee for the rest of their life in retirement, or other things such as survivor’s benefits for a spouse or children.
However, pension plans remain common in the public sector, and teachers are the most numerous class of public workers. These plans are managed by state governments or school districts, and over the past decade since the Great Recession of 2007–2009, many states have watered down benefits for existing and new employees, with many even replacing pension benefits with 401(k)-like accounts or adding an option for such an account. The FRS added such an option earlier than most, in 2001. Florida offers both a pension plan and a 401(k)-like plan (“investment plan”). Teachers and other public workers get to choose the plan they want when they start working for the State of Florida. Then, in 2011, the Florida legislature watered down benefits for both types of plans, which continues to this day despite a booming economy and stock market.
The idea of a retirement plan is set aside money to avoid poverty in the third phase of life, after one stops working. This phase (“retirement”) is getting longer as lifespans increase; although life expectancy is 79 in the United States now, about half of people will live beyond this, sometimes for a decade or longer, and women also have longer lifespans than men. Teachers and other public workers face a special challenge; about 40% of teachers won’t receive Social Security benefits (unless they worked another job), because 15 states including California do not participate in Social Security. Such teachers are even more dependent on their employer retirement plan. Florida does participate in Social Security, which means 12.4% of employee wages are sent to the Social Security Administration and Florida teachers will receive benefits in retirement, on top of any FRS benefits. Although private employers must participate in Social Security, opting out is a special option given only to public employers.
Retirement plans receive special tax treatment under U.S. law, which is why it is beneficial to put money in a retirement plan rather than receiving pay as normal taxable wages and putting the money in an account that is taxed for interest, dividends, and capital gains. Retirement is something that must occur after a certain age with respect to many plans; there are penalties for drawing on a 401(k) or individual retirement arrangement (IRA) before Age 59 and six months, full retirement age for Social Security is 67, and employees hired on or after July 1, 2011 in the FRS must work 33 years or become Age 65 before receiving their benefits. Retiring before these ages is also ill-advised for many Americans because they wouldn’t be able to afford it and they would lose their employer-sponsored health insurance before Medicare eligibility at Age 65, although the Patient Protection and Affordable Care Act has enabled early retirement for many financially privileged Americans since 2014, thanks to government insurance subsidies provided to Americans which are means-tested based on income, not wealth, which means that even millionaires can be on the dole if they have manipulated their present annual income to be low by ceasing work.
In a similar way, retirement plans allow Americans to manipulate their annual income, by the blessing of Congress as specified in the U.S. tax code, to reduce, defer, or eliminate payment of tax. For states that assess state and/or municipal income taxes, this may also have benefits (to workers) at these levels of government. There are also tax benefits bestowed on employers if providing nonwage benefits and deferred compensation, such as 401(k) plans, health insurance, stock options, et cetera. Data and research shows that workers, not just in the United States but also across the world, tend to spend money as they earn it, not investing for retirement or setting aside money for financial emergencies. Therefore, retirement plans also benefit workers by circumventing such inclinations, although voluntary plans or plans that allow withdrawals without much penalty or effort (such as IRAs) are less effective toward this end.
Putting money in a low-risk investment such as a certificate of deposit (CD) or U.S. government debt (Treasury bonds) is not an effective way to prepare for retirement because the money won’t grow much over time. One would typically talk about “saving” in respect to a savings account, CD, or government debt, so “retirement saving” is a bit of a misnomer. The term “retirement investing” is more appropriate, particularly for young people, who should have a large proportion of funds in the equities markets, as shares of companies’ stock which represents fractional ownership of corporations. Although events such as the Great Depression of the 1930s, the dot-com crash of 2000–2002, and the Great Recession of 2007–2009 decimated such investments, over several decades the probability of such events being counteracted by investment gains approaches 100%. That is to say, investing is the opposite of gambling; as you do it more and longer, your probability of an increase approaches 100%, whereas with gambling it approaches 0%. When it comes to pension plans such as the FRS pension plan, the government assumes investing risk and pays benefits based on a formula calculated from your employee class, salary, and years worked, regardless of how the stock market performs. When it comes to defined-contribution plans such as 401(k) plans and the FRS investment plan, you assume investing risk and may run out of money if you have bad luck or poor planning.
I will continue this in a follow-up post soon to come.