Teacher pensions are threatened

Traditional pensions paid to teachers are greater in value than even an idealized 401 (k) plan (“New Study Analyzes Teacher Pension Plan in Six States,” The National Institute on Retirement Security, Jan. 9).  Moreover, they play a critical role in retaining teachers.

Nevertheless, these traditional plans are not being fully funded, which puts them at great risk.  The best example is Chicago. In April 2009, the Illinois General Assembly allowed the Chicago Public Schools to pay a fraction of the dollars owed and extended by 14 years the district’s contribution.  As a result, funding of the pension plan was heading toward 50 percent instead of 100 percent.

This is a clear case of kicking the can down the road.  But eventually there will be a day of reckoning.  One way of solving the problem is to institute front-loaded compensation for teachers.  That is the opposite of what now exists. For example, pay teachers much higher salaries in their early years and pay for it by reducing pensions.  This might appeal to veteran teachers who are burned out but stay in the classroom.

I would not be interested in such a change because I knew from the start that I wanted to make teaching my lifetime career.  But not all teachers want to do the same.  Under current plan structures, teachers accrue almost no retirement wealth in their first several years. In Pennsylvania, for example, about 80 percent of teachers leave the system before their pension benefit is worth a single dollar.

If the goal is to recruit and retain the best and the brightest, it’s worthwhile giving teachers a choice between front-end loaded and back-end loaded pensions.  The outcome may be surprising.

(To post a  comment, click on the title of this blog.)

 

 

4 Replies to “Teacher pensions are threatened”

  1. Seems like the preferred approach is the defined contribution (401k) instead of a defined benefit plan. Under a 401k plan, the employer must pay all of the $ immediately so there is no problem of the employer underfunding the plan. The 401k approach also gives $ to the teachers who leave teaching after just a few years or who move to teach in another state. And, the 401k approach avoids the golden-handcuffs problem of burned-out teachers who must stay in the job to earn their full defined-benefit pension.

    A school system could switch from defined-benefit to 401k by giving each current teacher a payment into the teacher’s 401k account equal to the actuarial value of their accrued defined-benefit pension (although this would perhaps put an immediate financial strain on the employers who have underfunded the defined-benefit plan trust fund.

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  2. Labor Lawyer: What you say is true, but a 401(k) plan is riskier than a defined benefit plan. The former requires teachers to make investment decisions that most are not equipped to do. Yet I think teachers should be given a choice between the two.

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    1. Not an expert re 401k mechanics, but seems like it would be relatively easy to educate teachers re appropriate investment options; not a fan of arguing that teachers are not smart enough to look out for themselves.

      Not sure about the given-a-choice option — at a minimum, opting for the 401k could be interpreted by management as indicating that the teacher was not committed to staying in the system + for teachers who opted for the defined-benefit plan, a financially-savvy management might realize that, if the system had to discharge or layoff a few teachers, the system could save $ in the long run by eliminating the defined-benefit-plan teachers. Also, running both systems would double the administrative burdens and might make collective bargaining more difficult (as the twin plans would create two separate interest groups w/in the teachers).

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