Tuesday, September 22, 2015

Pension Plans for Teachers Aren't Fair to Those Teachers Who Won't Spend Decades in the Classroom .... 401(k) Plans Are Much Better

If you know any young teachers, ask them this question --- do they know their pension plan's vesting period?

Do they even know what vesting means? And if they do, is it a plan with cliff vesting? And if so, how long before the vesting occurs? {Hint: it's probably five to ten years.}

Then ask them this --- do they know how the pension benefits under the plan are calculated? {Hint: it's probably based on a combination of (1) their years of credited service up to a maximum (perhaps thirty years) and (2) their final average pay as measured by the average pay during the final five years or so of teaching.}

What this means in simple language is that young teachers pay into the system from day one but don't get anything from the system unless they have worked long enough for the pension benefit to vest, and that's usually after a period of five or more years, depending on the plan.

And even if they do manage to 'earn' a vested and 'deferred' benefit payable at age fifty five or later, they probably won't receive much of a pension unless they remain as teachers under the system for twenty to thirty years. And that's the way that pension plans for teachers take advantage of the young, courtesy of the teachers unions and school districts that determine what the negotiated plan benefits will be.

In other words, nearly all the dollars that go into the system are paid disproportionately to 'lifers' and not equitably to all plan participants, especially those who exit teaching or the relevant local system after a few years.

We are hearing lots these days about school districts and unaffordable pension plans for teachers. And for government run schools from Pennsylvania to Chicago to Seattle, the financial burdens on taxpayers have become huge. Yet we don't hear about how pensions for teachers are unfair to young teachers who won't spend their careers in the classroom.

In fact, there's a simple, effective, fair and affordable fix waiting in the wings -- 401(k) plans. These 'defined contribution' plans have become quite common in the private sector, and they are better than pension plans for the typical employee.

You see, 401(k) plans are portable and therefore better for those who don't spend a lifetime at the same job, whereas pension plans work to the advantage of 'lifers' who start early and stay until they are fully vested. But most teachers aren't 'lifers.'

How Young Teachers Pay for Those Who Won't Budge is subtitled 'New, more mobile teachers are being exploited by lifers who refuse to reform unaffordable pensions:'

"As America’s young and freshly hired teachers excitedly begin a new school year, it’s a good bet that most are unaware that the financial deck is stacked against them. How so? They are paying for the pension benefits enjoyed by retired and retiring colleagues—benefits that most of them will never see.

The pension plans in most public schools are structured to favor the small minority who teach in a single system for a working lifetime, at the expense of the vast majority who leave the system much earlier in their careers. These plans are not equitable and may discourage talented young people from choosing to teach in public schools.

About 91% of public-school teachers are enrolled in defined-benefit plans that base retirement income on a percentage of average salary during the last few years of employment. . . . What can’t be argued is that states are able to fund pensions for lifers by redirecting money that was not paid out to those who exited the system earlier.

Under current plan structures, teachers accrue almost no retirement wealth in their first several years—then accrue substantially more as they near retirement age. . . .

The Pennsylvania Public School Retirement System’s actuaries expect that about 80% of teachers will leave the system before their pension benefit is worth a single dollar. And according to a report last year from Bellwether Education Partners, more than half of all public-school teachers nationally will exit their school systems before their pensions vest.

This pension structure disadvantages teachers who leave education for another profession and those who move to another state in mid-career. Economists Robert Costrell (University of Arkansas) and Michael Podgursky (University of Missouri) have calculated that compared with a teacher who works within a single state for 30 years, a teacher who splits that same time across two systems accrues less than half the pension wealth.

Moreover, a Bellwether report in July showed that pension cuts in response to the Great Recession fell almost entirely on the backs of newly hired and future teachers. This is in part because courts have interpreted state laws as prohibiting any reductions in the pensions that current or retired public employees were promised. So instead pension benefits for future teachers have been cut, and the number of years before their pensions vest has been increased.

No one becomes a teacher to get rich. But today’s pension plans discourage talented young people from entering the classroom. Several reforms can help fix this problem. . . .

Young teachers also would be better off if states based accrued rights to defined-benefit pensions on a fixed percentage of yearly salary, instead of being heavily backloaded. States also could adopt defined-contribution structures similar to the 401(k)-type plans that most private employees (have) . . . .

No such changes are likely unless younger teachers become aware of how they are being exploited by their retirement plans. Their union representatives have no interest in making this point clear and will be unlikely to buck the lifers to change the system. But public-school reformers ought to fight on behalf of the new generation of teachers."

Summing Up

Contrary to popular belief and misconception, the great majority of teachers would be better served by a 401(k) defined contribution plan rather than a defined benefit pension plan.

The pieces of the pie aren't fairly apportioned, as the lifers get a windfall at the expense of the youngsters and those teachers who leave the local system after a few years.

And since they are forced to pay into the system from day one, their benefits shouldn't be forfeited when they exit the system for whatever reason. Instead they should vest from day one.

And if and when they decide to leave the system, they should be able to take their 'portable' and 'earned' account balance with them.

It's only fair, but it's hardly understood, and it's never explained.

That's my take.

Thanks. Bob.

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