The Dual Challenge Of Fixing Teacher Pensions

In Sunday’s Washington Post Chad Aldeman and I take a look at the teacher pension issue. There are really two distinct issues here. One is the funding problem, that gets a lot of attention and there is plenty of blame to go around for the sorry state of affairs in too many states. But there is also a design issue, even properly funded the traditional pension system is not a good fit for today’s workforce.

Americans are struggling to save for retirement at a time of still-high unemployment rates, rising college costs and stagnant wages. For many workers, individual circumstances lead to inadequate savings. But for public school teachers, poorly structured retirement policies hinder their future security…

…This story doesn’t fit with the popular perception of teacher pensions as more generous than private-sector retirement benefits. That’s because the real story of teacher pensions today involves a small number of relatively big winners and a much larger group of losers…

…In contrast, 17 states, including Maryland, Illinois, Michigan and New York, withhold all employer contributions for teachers until 10 years of service. “Vesting” is an important milestone, but it guarantees only a minimum pension in retirement. The largest rewards go to those who remain in the system for 30 or more years, something few workers do today…

…Long vesting periods help state legislators and governors who have failed to properly fund their state’s pension plans. Extending the amount of time it takes for a teacher to qualify for a pension reduces the number of teachers who will qualify. During the recent recession, 12 states lengthened their vesting period to help address funding shortfalls. It saves money, yes, but it does not help teachers…

…Except among ideologues, there’s no ideal solution to these problems, and every remedy carries trade-offs. Well-designed 401(k)-style plans, hybrid plans that combine traditional pension plans with a 401(k)-like component or alternative models called cash-balance plans, which guarantee a moderate interest rate, could provide sufficient savings and give teachers greater job flexibility. At a minimum, states should ensure that teachers can take with them their own contributions, a share of the interest those contributions accrued and some share of the employer contributions made on their behalf…

The entire op-ed is here.  More background including state by state analysis of the percent of teachers who vest and those that reach normal retirement age in this paper (pdf).

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