CAP, Fordham Offer Solutions to Teacher Pension Crisis

New reports give recommendations for reforming teacher pension programs.
by | October 25, 2011
 

Despite a growing consensus that pension systems for teachers and other public employees are untenable, little headway has been made to address a problem that could threaten the fiscal solvency of governments. Two policy think tanks, the Center for American Progress (CAP) and the Fordham Institute, recently released reports reviewing diverging options for state and local governments looking to reform their teacher pension programs.

Both studies found the same problems with the current model of a traditional defined-benefit (DB) program, in which 89 percent of teachers participate, according to CAP. Benefits are only received by those teachers who work for a prolonged period of time and often in one place. Teachers who opt to move to a new location or take another career path cannot take benefits with them. In an increasingly transient society, the result is many teachers paying for the benefit of a few.

While both reports identified the same problems, the solutions they outline diverge on key points. The Fordham Institute's study, based on six case studies of government pension reform, favored systems that adopted a defined-contribution (DC) model or blended it with a DB system. The Center for American Progress report recommended a cash-balance DB plan for new teachers, allowing for individual accounts while still placing the responsibility for management of investments and payment of benefits on employers.

The CAP report's recommendations “point the way toward a transition in the way that the teaching profession arranges for pensions,” author Raegen Miller writes, “from one where the incentives for entering and remaining in the classroom are hopelessly mismatched with career expectations of 21st century teaching candidates, to a way in which pensions complement other compensation policies to improve the quality of the teaching workforce and the distribution of its talent.”

Miller tells Governing that this last point is the key to his recommendations. Traditional DB pensions are "the lynchpin of the status quo," he says, and a changing workforce demand a new approach to retirement benefits. That approach must strike a balance between adjusting to the new norms of the teaching workforce, which is much more like to move or change careers, and providing retirement security for teachers, Miller says.

"To have a compensation policy completely misalign with the working career trajectories of future employees seem like a missed opportunity," he says. "Very few of new teachers plan to be teaching for 30, 40 years. That is quite a change."

Fordham’s case study approach aims to show that changes in pensions have been and can be implemented. “There is a lot of inertia on these issues, and to some extent, rightfully so,” Chris Tessone, director of finance at Fordham and adviser for the report, tells Governing. “These are big ships, but they can be turned. Legislators who recognize the problem here need to start talking to stakeholders...to move toward plans that make more sense”

The only hindrance, Tessone says, is finding state and local governments or school districts willing to try new approaches. Union opposition could be a significant hurdle for policymakers interested in attempting fundamental pension reform. Both the National Education Association (NEA) and the American Federation of Teachers (AFT) have stated their firm belief that a DB system is in the best interest of their members. They note the risks involved with DC plans, particularly the volatility of the stock market.

In a conversation with Governing, John Abraham, director of AFT's member benefits department, acknowledges the need for some kind of reform. Portability, in particular, is an issue that deserves attention with the changing preferences of the teaching workforce, he says, a concern raised by both Fordham and CAP. But, he points out, pensions should viewed in the long-term, which would allow "incremental changes," such as increased contributions by employees and employers, to offset the losses experienced during the recession that have sparked this latest debate about pension reform. More fundamental reform might be an overaction, Abraham says, and traditional DB plans provide teachers with a sense of security that DC programs can't match.

"You can't outlive the benefit. You get this guaranteed benefit that you can't outlive and is not affected by the ups and downs of the stock market," he says. "In a [DC] plan, you have to worry about outliving the balance, so people become very conservative with their retirement, and their living standards suffer."

While Fordham's plan possesses some significant differences from the one proposed by Miller, Tessone says both approaches show there is room for compromise and imagination in reforming teacher pensions. Miller commends Fordham's research for demonstrating that it is possible for government bodies to successfully institute fundamental reform.

“There isn't one right answer to this question. There are a ton of different ways to approach this,” Tessone says. “This is how democracy works in the United States. We have all these experiments going on.”

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