Dollars…And Sense?

Here is an eduissue to keep an eye on: While the rest of the economy is shifting — for better or worse — from defined-benefit retirement plans to defined-contribution ones, education stays mostly wed to traditional pensions. It’s not good for teachers because it lessens their mobility and financial control and as some forthcoming research will show, some cities have pension arrangements that are fiscally untenable over time.*

What’s worse though is that just as retirement financing is shifting more toward individuals rather than taking the lead and empowering their members some teachers’ unions are demonstrably ill-serving them! So reports The Los Angeles Times (via Intercepts) in a must-read story you won’t be seeing in NEA Today anytime soon! Apparently, some of the nation’s teachers’ unions are doing little to protect their members from hucksters offering them shoddy investment advice and in fact even abetting the problem.

The shady dealings will obscure a larger issue. In education, shifting from defined-benefit to defined-contribution plans offers several benefits for teachers. First, it is more empowering for teachers because they have more control over their professional mobility. Traditional pension plans do create disincentives for older teachers to move, in effect reducing the leverage of good teachers if they’re seeking to change jobs. There are workarounds here (portability, buy-ins, etc…) but it’s not a straightforward matter if a teacher wants or must move out of state. And for younger teachers, particularly those who do not plan to make a 30 year career of teaching, traditional pensions offer them less financially than if they invested their money on their own in tax-deferred accounts. And, in some cases such arrangements would allow them more flexibility with things like IRAs as well than they have now. Finally, 401k style arrangements would also offer another way to offer incentives for teachers who took on special assignments, had scarce skills, or were otherwise exceptional or high performers.

However, today’s teachers, especially older teachers, came into education with one understanding of what retirement would entail financially if they upheld their end of the bargain. Consequently, any shift toward more of a 401k approach rather than today’s defined benefit plans would have to address substantial transitional issues to ensure that current teachers were treated fairly. And, in some states issues like Social Security eligibility would further complicate any transition. Nonetheless, those are issues that can be addressed equitably in public policy. In the end, a system that empowered teachers more would be for the good and it’s a conversation worth having. In the meantime, don’t take the salesman at face value!

*Politically, this could provoke a backlash at some point…seems better for the teachers to strike a good bargain now ensuring a fair transition and then move on to a more contemporaneous retirement arrangement. Public sympathy will wane when no one else has a guaranteed retirement with full health etc…

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