Chad Aldeman's blog

  • States Try to Change the Rules After the Game Is Over

    September 12, 2013
    Chad Aldeman

    The Wall Street Journal highlights a lawsuit going before a Minnesota court today that could significantly impact the way teacher pensions are looked at from a legal standpoint. Essentially, the state said it was broke, its teacher pension plan was too generous, and it was going to reduce future benefits, even to current retirees. The Minnesota case is the first of three key tests in the states to determine whether these actions are legal. The graphic below shows what changes other states are making to their pension plans. 

    First, if you care about teacher pensions, go read a copy of the Minnesota lawsuit (.pdf). One defendant worked for the City of Duluth for 34 years as a Draftsman before he retired in 2000. The other taught at a Minnesota public school for 14 years before retiring in 2008. These two retirees are part of a potential class-action lawsuit that could include up to 130,000 persons already receiving pensions from the state of Minnesota. The state has chosen not to enroll its public-sector employees in Social Security, meaning they have no other government-provided retirement benefit. To ensure that worker pension benefits do not wear away over time, the state has used a dual-component formula to allocate regular cost-of-living adjustments (COLAs) indexed to the rate of inflation.

    In 2009 and 2010, Minnesota decided the COLAs were too generous, and so they reduced them and made them contingent on the plan’s overall funding level. We’re talking about small percentage changes here, but, over time, it adds up to real money.

    The state claims its pension fund is broke and it needed to make these changes to ensure the plan’s long-term survival. That claim falls short on several accounts. For one, the state pension plan has never been fully funded and, after one of the worst decades in stock market history, it looks worse than it probably should. Two, Minnesota, like other states, enacted retirement benefit enhancements during the stock market boom of the late 1990s.

    Legal Issues
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  • Keeping Up, And Down, With the Joneses

    September 12, 2013
    Chad Aldeman

    Public- and private-sector workers’ retirements used to be structured similarly. Not that long ago, both groups were likely to have access to defined benefit pension plans that guaranteed monthly payments until death. Both sets of workers retired at about the same ages.

    These things have changed over the last 25 years as private-sector employers have abandoned DB plans, private-sector workers have been retiring at older ages, and public-sector workers, including teachers, have been retiring younger. By 2009, only one in five private-sector workers had access to a DB plan, compared to 89 percent of teachers and 84 percent of all state and local government employees who are still enrolled in one.

    People make retirement decisions for all sorts of reasons. Maybe they have grandchildren they want to spend time with, or a hobby they want to develop. People also base their retirement decisions on both the amount and the structure of their retirement benefits. Even after controlling for total wealth, the security offered by DB plans–those guaranteed monthly payments until death–lead people to retire 1-2 years earlier than they would with 401k plans. Because of the generosity and the structure of their retirement plans, teachers now retire more than four years younger than private-sector workers.

    This divergence didn’t always exist, but it’s becoming a real problem. The workers at companies that used to offer DB plans but now only have access to less-secure 401ks are not likely to tolerate this imbalance forever. The Wall Street Journal is reporting that many employers who cut their matching contributions during the Great Recession have been slow to reinstate them, which will only make the problem more pronounced. Teachers and other public workers have long traded lower base salaries for better benefits and more security, but that dichotomy has become more obvious and more important. Taxpayers may not continue to look kindly on generous teacher and government-worker retirement plans as their own are being cut. 

    This blog entry first appeared on The Quick and the Ed.

    Funding
    Mobility and Portability
    Pensions and Human Capital
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  • The Sensible Social Security Solution

    September 12, 2013
    Chad Aldeman

    One of the big problems with teacher pension plans is that they’re not portable. A teacher who works 30 years in the same state can expect to earn retirement benefits that are 30-70 percent higher than a peer who divides that same career into two 15-year stints in different states. The teachers, the salaries, the job, everything can be the same, but the mere fact of moving, even one time, can significantly impact a teacher’s retirement wealth.

    This problem is exacerbated in the 13 states where teachers and other government employees do not participate in Social Security. These states, representing about one-third of America’s teaching work force, have made the calculation that they will be able to provide better retirement benefits to workers by investing contributions in the stock market rather than paying taxes into Social Security. That calculation may be correct for the state itself over the long run (but it doesn’t look too smart right now…), and it may mean higher benefit payouts for workers who stay in the system, but it’s certainly a losing proposition for teachers who move across state lines.

    The New York Times has an interesting story about Maine’s ongoing attempt to move teachers into Social Security. It reports that only about one in five teachers in Maine stick around long enough to earn maximum retirement benefits, and the rest leave, taking neither a full pension nor Social Security benefits with them. Mobility figures are similar in other states.

    The proposed changes will not affect current workers, and thus will not improve the condition of the state’s pension fund. Still, it’s a sensible solution to both improve the state’s long-term fiscal outlook while simultaneously helping out mobile teachers. 

    This blog entry first appeared on The Quick and the Ed.

    Funding
    Teachers and Social Security
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  • Fuzzy Math on Teacher Retirements

    September 12, 2013
    Chad Aldeman

    Michael Mulgrew, head of the United Federation of Teachers in New York City, suggests the city can ease its budget crisis by offering early retirement incentives for experienced teachers to retire. In today’s New York Post he writes:

    Retirement incentives are particularly effective in the Department of Education, since senior teachers make more than twice the salary of entry-level teachers. There are about 25,000 experienced teachers to whom such an incentive could be offered right now. Given current salary levels, the retirement of 1,000 of them would save the city $55 million per year. If 4,000 senior teachers were to retire, the system would save more than $220 million – even if every retiree is replaced by a new teacher.

    This is a common argument you hear during budget crises, but the math does not add up. Given New York City’s hiring spree over the last decade, not to mention local pressure to keep class sizes low, it’s safe to assume the retiring teacher would indeed be replaced. To get to Mulgrew’s $55,000 savings per teacher, we have to assume the district will replace a teacher that’s maxed out on the salary schedule ($100,000 in NYC) with one without a Master’s degree or any years of experience ($45,000).  Mulgrew’s figure is the maximum amount and any variation (say, if the new hire had a few years of experience or additional credits beyond a bachelor’s degree) would reduce the savings. More importantly, this calculation does not include the minimum $44,000 annual pension that a retiring teacher with that level of experience would be eligible to receive. Including health insurance costs–New York covers 90 percent of retiree health expenses–would wipe out any remaining “savings” completely. This does not count any one-time payments or new early retirement incentives that might be used to encourage senior teachers to retire.

    These payments do come out of slightly different pots of money, and it might be tempting during a budget crisis to play around with numbers and come up with magic savings, but ultimately that’s just dishonest. 

    Funding
    Pension Politics
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  • Updated: Public and Private Pensions

    September 12, 2013
    Chad Aldeman

    The Foundation for Educational Choice has a new report today attempting to change the way we treat public pension plans. It essentially boils down to this: States themselves claim their pension funds covering teachers, principals, and other educators, are 78 percent funded, but the authors use different calculations based on what’s expected of private companies, derive another number and poof! the funding ratio drops to 60 percent. They then throw out the eye-boggling stat that states are actually $933 billion in the red due to unaccounted pension obligations.

    Don’t believe it.

    See, private pension funds are different than public ones, and they should be treated differently too. Private companies are required to contribute, on behalf of their defined benefit (DB) pension plans, to something called the Pension Benefit Guaranty Corporation (PBGC). The PBGC asks all employers with a DB plan to fully fund it so their future obligations are covered in case they ever go out of business or run out of money. When private employers fail to meet these obligations, they pay into the PBGC fund at higher levels. The PBGC can then compensate workers if their employer goes belly up. So when Enron, TransWorld Airlines (TWA), and Bethlehem Steel went bankrupt, their workers still earned some retirement benefits that had been promised them.

    States, unlike private companies, do not fold under. Indiana, which according to the authors has a DB pension plan for teachers that is only 42% funded, is not likely to go out of business and take its workers down with it. The state of Indiana can assume a riskier investment return for its pension fund than an employer like those mentioned above or any other modern private firm (and, just for good measure, it’s worth pointing out that Indiana assumes only a 3 percent real rate of return).

    All this is lost on the report’s authors, who would prefer states lower their assumptions on stock market returns from about 8 percent down to 6, the standard rate used by corporations in their calculations. This would mean telling a state like Pennsylvania, which has accumulated a 9.23 percent return in the stock market over the last 25 years (as ofFebruary 2010), that its 8 percent investment assumption is too high.

    There are good reasons to consider changes in state pension plans, but this isn’t one of them. Expect more on this topic from Education Sector in the coming months.

    Funding
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