This is the first in a series of posts that will introduce the Fordham Institute's newest publication, Halting a Runaway Train: Reforming Teacher Pensions for the 21st Century. Today's entry outlines the seriousness of the teacher pension crisis; check back over the coming days for a peek at the examples and lessons the report provides.
Public employee pensions, like those enjoyed by the vast majority public school teachers, are intended as a form of individual financial security: compensation each employee earns through decades of service. Today, however, they represent a grave and deepening threat to the nation's economy.
In 2010, the Pew Center on the States found a $1 trillion gap between the retirement benefits states promised and the funds allocated to pay for them as of 2008. A year later, the financial crisis had pushed the tab up another 26 percent.
The effects of this liability are already popping up: when Standard & Poor dropped New Jersey's credit rating in February, the first explanation given was ?concern regarding the stresses from the state's poorly funded pension system.? Such fallout can only be expected to spread, with Pew reporting that pension funds in 31 states were funded below 80 percent in 2009.
How did the situation get so grim? While the financial crisis and irresponsible politicians played their parts, the defined-benefit (DB) models dominant in the public sector are at the core of the problem. Most teachers, and public workers in general, are shielded from financial uncertainty by plans that guarantee them pensions that pay a set amount, regardless of economic or political changes. This places the risk that the fund will depreciate on the employer, whereas private sector employers tend to remove the employer's risk and stabilize employer contributions through defined-contribution (DC) plans.? In this model, workers and/or employers contribute a set amount to their retirement fund without a definite expectation of return.
Furthermore, these plans were built at a time when life expectancy was much shorter than it is today. Many teachers who retire today will spend as much time as former teachers as they did as active teachers. We simply have not saved enough money to support a generous retirement for three decades or more. And shoring up these systems could put a crushing burden on school districts, taxpayers, or both.
While it's hard to deny that public-sector pensions represent a looming and dire threat to the economy, try getting Americans to agree on who's responsible for the mess, or for cleaning it up. Economic upheaval and legislated sweeteners to DB plans have left pensions underfunded and utterly unsustainable. While conservatives governors like Scott Walker and Chris Christie have gained national prominence by tackling the issue head-on in the name of fiscal responsibility, they have also earned the wrath of millions of public workers. Government employees, teachers chief among them, have defended the benefits promised them with rallies, donations, and votes, arguing workers shouldn't pay for the irresponsible promises of reckless lawmakers.
The contentiousness of the issue makes any effort at reform seem daunting. As author Michael B. Lafferty writes in Fordham's newest report, Halting a Runaway Train: Reforming Teacher Pensions for the 21st Century,
We're at a point in time where a major public-policy (and public-finance) problem has been defined and measured, debated and deliberated, but not yet solved??
Not yet solved?.
Except where it has been. There aren't many such places, especially in public education, but it's important to learn all we can from them and to try to distill lessons that others may apply.
Drawing on examples from within and without education, the study provides case studies of successful pension reform. From IBM to the federal government, a Florida charter school to the state of Alaska, the challenges and benefits of overhauling a precarious and unsustainable retirement model are analyzed and synthesized to distill insights valuable for policymakers, workers, and taxpayers alike.
In the coming days, we'll look at those examples in greater depth on Flypaper, but for now download the report for a refreshingly productive look at a crucial issue.
-Tyson Eberhardt
