Alternative Models

The debate between traditional pensions and 401k-style defined contribution plans like those more common in the private sector presents a false choice. There are other retirement systems that combine some of the best features of both types of plans and provide employees with security and portability. The federal government, for instance, has phased out its reliance on a traditional pension plan in favor of a hybrid retirement system that combines a less-generous pension, enrollment in Social Security, and a defined contribution plan. Other states have adopted similar hybrid models.

Another alternative retirement structure called a cash balance plan combines many of the best elements of both defined benefit and defined contribution plans. Each year, the plan awards employees with a salary credit set at the fixed percentage of salary and an investment return credit that is set at some relatively safe percentage. When workers are ready to leave or retire, they can take their entire balance with them as a lump-sum payment or convert it to an annuity that would guarantee them monthly payments for life. Millions of workers in the private sector belong to a cash balance plan, and several states have adopted cash balance plans for their government employees.

In other words, the choices facing policymakers aren’t simply between a traditional pension and an ungenerous 401(k). There are viable alternate options, and structural changes from current plans can and should be favorable to teachers.

Topic Resources

When Teachers Choose Pension Plans: The Florida Story
This paper analyzes a 2002 policy change in Florida allowing teachers to choose between a traditional defined benefit pension plan and a 401k-style defined contribution plan. The authors were able to track who chose which plan, what subject they taught, how effective they were in the classroom, how long they remained teaching, and whether the pension plan’s structure had any effect on retention. The paper also estimates how many teachers lose out under the state's defined benefit plan and how much they stand to lose in retirement savings.
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Creating a Combined Approach to Retirement Security
One of the most well-known transformations of a pension system occurred when President Ronald Reagan signed the Federal Employees’ Retirement System Act into law on June 6, 1986. This law moved federal employees from the Civil Service Retirement System (CSRS), to a retirement system that integrated Social Security, a DB pension, and a DC savings plan.
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Is Nebraska's Cash Balance Pension a Model?
Nebraska state employees hired since 2003 join what public pension analysts call a "cash balance" retirement plan , which includes features of both a traditional defined benefit pension and a 401(k)-style system. The hybrid plan is getting new attention from other states searching for alternatives to the decades-old defined benefit system whose cost is rising as Baby Boomers retire and pension portfolios recover from record losses during the Great Recession.
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Are Cash Balance Plans the Answer?
Nebraska presents what could be a model for public sector pension reform, the so-called “cash balance” plan that offers some of the better aspects of both traditional defined benefit pensions and the defined contribution, 401(k)-type plans that dominate in the private sector.
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