Tomorrow’s Today’s Problem Today

August beach reading for you: In a new paper from ES Chad Aldeman and I take a look at the teacher pension issue (pdf).    Punchlines:  Big fiscal problems with a few culprits (and you can’t just lay this one at the feet of the unions), the current system out of alignment with the emerging workforce and efforts to improve human capital in education, but all the reform options have trade-offs as well.  Complicated.  Political.  Interesting.

But this is a looming fiscal crisis in more than a few states, some are basically already there, and it’s an issue that demands attention.

One Reply to “Tomorrow’s Today’s Problem Today”

  1. Interesting paper Andrew but there are some major omissions. By way of background, I worked 10 years as a Federal employee and 5 years in the private sector before going into teaching so I’m familiar with the Federal retirement program and private sector 401(k) programs as well as the traditional teacher’s pension here in Texas.

    Something you did not mention was the Federal employee retirement program which I think should actually be the model for states. Back years ago (not sure exactly when) the Federal government switched from a traditional defined benefit pension program to the current 3-tiered program in which Federal employees participate in 3 separate programs at once. (1) All Federal employees participate in Social Security which provides one leg of their retirement and an important one, (2) All federal employees receive a 1% defined benefit pension that is not back loaded or any such. It’s simply 1% of last 5 year’s pay x number of years worked. Finally, the Federal government provides a thrift savings plan (equivalent of a 401(k)) and matches up to 5%. This system would make more sense than most any teachers pension programs out there on a whole lot of levels.

    First, participating in social security makes a lot of sense for both teachers and states as it takes all the eggs out of one basket and makes that portion of the teacher’s retirement 100% portable between professions and between states.

    Second, maintaining a modest defined benefit pension on top of social security removes some of the risk that retirees face with 401(k) types of plans. It is a mandatory savings and can’t be cashed out for other purposes by imprudent individuals. And it would be easy for states with existing pension plans to shift new employees to a Federal type system by simply maintaining the existing pension for current retirees and then let new participate in the same pension but at a lower formula that would be made up for by social security and the 401(k) type match.

    Finally, providing statewide 401(k) type of program for teachers with a state or district match along the Federal model would help wash away a lot of the immense scamming and abuse that happens today with all the shady 403(b) agents that hover around schools preying on teachers with excessive fees and hidden cost variable annuity nonsense. The Federal government provides a suite of super low cost index funds that are simple and easy to understand. I see so many fellow teachers get scammed in my district by shady investment “advisors” who put them into costly variable annuity plans and it was actually extremely hard for me to set up my own no-fee plan through Vanguard.

    I’m married to a doctor who is considerably younger than me so we’re not exactly relying on my Texas teacher’s pension for retirement. But were I not, I would have thought long and hard about changing careers to teaching as I will most definitely get screwed on both my social security from my pre-teaching days and my Texas teacher’s pension when I finally retire.

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