The Unseen Burden: How New Jersey's Teacher Pensions Are Impacting Education
New Jersey's public schools are struggling with a quiet financial crisis. The state's education-employee pension plans are severely underfunded, and the cost of fixing them is taking away from essential classroom resources. As of 2023, the Public Employee Retirement System and the Teachers' Pension and Annuity Fund reported funding ratios of 48.4% and 34.7%, respectively. These numbers may seem like a slight improvement since 2015, but they still rank New Jersey among the worst-funded pension systems in the country.
The financial strain is evident in the increasing pension contributions. Between 2015 and 2023, these contributions rose from just over 2% to more than 12% of all expenditures related to employees. This 10-percentage-point increase is the largest in the country. While per-pupil expenditures in New Jersey increased by 11%, real pension contributions per pupil skyrocketed by 332%. This massive surge in pension costs consumed the entire increase in pension-covered employee expenditures from 2015 to 2023.
If New Jersey had maintained its 2015 contribution share in 2023, the state would have had an extra $3.2 billion to invest in classrooms. This money could have been used to hire new teachers, improve curricula, or expand classroom support. However, the actual cost may be even higher. The reported funding ratios rely on assumptions about investment returns. If these assumptions aren't met, the problem will worsen. For example, if the plans consistently miss their 7% investment return target, the annual contributions required to pay down existing pension debt over 20 years would jump from $4.3 billion to $7.4 billion.
This increase would significantly impact local school districts, pushing pension costs from 12% to nearly 21% of covered-employee budgets. Some might think that raising taxes is the solution, but this approach has its limits. New Jersey already ranks 48th in income-tax competitiveness, and the state's outmigration rate is one of the worst in the country. Raising taxes could lead to a downward spiral, where those who remain bear a heavier burden.
A more effective solution is available. To ensure long-term fiscal stability, policymakers should distinguish between honoring past commitments and managing future risk. Enrolling new employees in defined-contribution or hybrid retirement plans can prevent new unfunded liabilities. For existing pension promises, funding policies should use more realistic investment assumptions. This will give leaders a clearer picture of future costs and help prevent pension costs from consuming education resources.
