In the world of education, teachers often find themselves facing financial challenges that are unique to their profession. From paying for classroom supplies out-of-pocket to working well beyond contract hours, educators have long been underappreciated and underpaid. But there’s one issue that can have a profound, long-lasting impact on a teacher’s financial future that doesn’t get enough attention: salary stagnation in the final years of teaching.
In my last newsletter, I touched on how, in one school district in Kansas City, Missouri, teachers’ salaries plateau after year 17 (see salary schedule below). This is not just less pay during that school year, it also negatively affects your pension under the Public School Retirement System (PSRS) of Missouri. Today, I’m diving deeper into this issue, exploring how minimal raises in the last years of your career can have long-term financial consequences.
How PSRS Pension Benefits Are Calculated
Before we get into the specifics of how salary stagnation hurts teachers financially, it’s important to understand how PSRS works. Missouri’s PSRS operates as a defined benefit pension plan, which means your retirement benefits are determined by a formula, not by the amount of money you’ve contributed.
The key factors that determine your PSRS pension are:
Years of Service: The total number of years you’ve worked in a PSRS-covered position.
Final Average Salary (FAS): The average of your highest three consecutive years of salary.
Multiplier: A percentage (currently 2.5%) that determines the portion of your final average salary you will receive as a pension benefit for each year of service.
In simple terms, your pension benefit is calculated as:
Years of Service x FAS x 2.5% = Annual Pension Benefit
So, the higher your final average salary, the higher your pension payments for the rest of your life. And this is where salary stagnation in the final years of teaching can become a major problem.
The Impact of Salary Stagnation on Your Final Average Salary (FAS)
Let’s say a teacher’s salary schedule allows for decent raises in the early and mid-career years. But after year 17, raises are almost non-existent, increasing by only $300 per year.
While this may not seem like a huge problem at first glance, it can significantly impact the Final Average Salary (FAS) that determines your pension.
For example, if you’ve been receiving steady raises throughout your career, like many other Kansas City school districts, your FAS might reach $90,000+ by year 30. But in one Kansas City school district, those minimal raises after year 17 caused the FAS to be closer to $80,000. That $10,000 difference doesn’t just affect your income while you’re working—it lowers your pension for the rest of your life.
Let’s break it down:
Scenario 1: A teacher with a FAS of $90,000 and 30 years of service would receive an annual pension benefit of $67,500 (30 years x $90,000 x 2.5%).
Scenario 2: A teacher with a FAS of $80,000 and the same 30 years of service would receive an annual pension benefit of $60,000 (30 years x $80,000 x 2.5%).
That’s a $7,500 difference per year in retirement income. Over 20 years of retirement, that adds up to $150,000 in lost pension benefits. And that’s assuming no cost-of-living adjustments (COLAs) are added to the pension over time, which would make the gap even wider.
Since 2001, there have been 20 COLAs under PSRS, which, given the exact same numbers as above, would result in a $250,000 difference in benefits received. Imagine if the teacher (or their spouse) continues to receive benefits for 20+ more years!
Long-Term Financial Implications
The implications of this are significant. When you retire, your pension likely becomes your main source of income. A lower pension means you may have to adjust your lifestyle, delay major purchases, or rely more heavily on other retirement savings, if you have them.
For many teachers, a PSRS pension is their primary or only retirement plan, making any reduction in benefits even more impactful. The fact that salary stagnation after year 17 leads to a lower FAS means that the consequences of small raises are compounded over a lifetime of pension payments. This isn’t just an issue of receiving less money while working, it’s an issue that can affect your financial security for decades after you retire.
What Can Be Done?
This issue highlights the need for reform in how salary schedules are structured, particularly for long-term teachers. It’s crucial to advocate for:
Better Pay for Experienced Teachers: Salary schedules should be designed to reward long-term service, not plateau after year 17. Teachers who have dedicated their lives to educating the next generation deserve more than minimal raises in their final years.
Increased Pension Awareness: Teachers need to be aware of how their salaries impact their pension benefits, especially in the crucial years leading up to retirement. School districts and state boards should provide better financial education to help teachers make informed decisions about their careers and retirement.
Policy Changes: It’s important to push for policy changes that recognize the true value of experienced teachers. This could include offering incentives for staying in the profession, and providing meaningful raises.
Final Thoughts
The pension system is a lifeline for teachers after years of service, but the hidden costs of salary stagnation can erode the financial security it’s meant to provide. Teachers deserve more than a $300 raise each year. They deserve to be valued both while they’re working and in retirement.
If you’re nearing retirement, it’s essential to understand how your salary in these final years will affect your pension. Take the time to review your district’s salary schedule, calculate your projected FAS, and explore your options for boosting your retirement income. It’s never too late to take control of your financial future.
David Gourley, CSLP® is the Founder and lead Financial Planner at K-12 Planning, an independent financial planning firm specializing in finance for teachers. He served for eight years as a high school mathematics teacher before transitioning into the financial services industry. He started K-12 Planning in 2024 and his passion for serving as a fiduciary for teachers and a student loan planning expert runs deep, as his wife and several other family members have served as educators for years.
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