May 14, 2014

Pension Primer – Four Things To Keep In Mind

By Bellwether

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The dissonance between the facts of the teacher pension issue and the way it’s discussed seem to grow by the day. Here’s a primer on four important aspects to keep in mind:

  1. States vary. States have done better or worse jobs meeting their obligations to retirees and future retirees. Some states have pension systems that are well-funded and stable. Others are basket cases. Overall there is at least a $390 billion shortfall between what states have and what’s owed, but that gap is not evenly distributed among the states and municipal pension systems. The data in this paper is old but it describes the trends and variance. States also vary in the quality of their plans. In some it’s hard to vest and see any of the employer-side contribution to your retirement, in others vesting periods are shorter. In “Friends Without Benefits” (pdf) you can see vesting timelines and data on what percent of teachers vest and reach normal retirement age for each state.
  2. The problems are fiscal but also about design. Just addressing the fiscal problems still leaves the question of whether a retirement system that benefits few teachers at the expense of many is really a good fit for the more mobile educational labor force today. The savings penalties the current system puts on teachers are substantial and a broader retirement security problem considering the numberer of teachers in the United States. In other words, the idea that pensions work well for teachers now is not supported by the evidence. They work well for a small group of teachers and adversely impact most. It’s hard to see how a system where few workers can achieve its maximum intended benefit is a really good retirement system.
  3. The choice facing policymakers is not simply 401K-style plans versus today’s defined benefit pensions. Increasingly the debate about pensions is being pitched (deliberately by those trying to shut it down) as a battle over today’s pensions versus giving people a 401K and leaving them on their own. In fact, there are a range of options policymakers can consider, including hybrid models that blend pensions with defined-contribution savings plans, options like cash-balance plans, or 401K-type plans or traditional pensions with different design features. The key issues are about how plans are designed, for instance how portable are they without penalty, how much employers contribute and how workers can access those contributions more than the particular legal structure. In other words, it’s possible to design a 401K plan that is generous or stingy or a pension plan that works well for workers or penalizes most.
  4. Social Security plays a role here. Teachers should be in Social Security in addition to a retirement plan. Forty percent are not and it costs them.

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