Blog: Funding

The recent firing of FBI Deputy Director Andrew McCabe prompted a political firestorm. In addition to the posturing and prognosticating, many observers were outraged that he was fired just hours before he could retire with full pension benefits. The concept of suddenly losing your retirement savings is understandably alarming to most Americans. If nothing else, the McCabe example is a good reminder that at-will employment and back-end “guaranteed” benefit systems are not always a sure thing.  For that reason, the McCabe story draws many parallels to the problems with current teacher retirement benefits.

Let’s first discuss the real consequences of McCabe’s firing on his pension. Then, tackle how the worry over his financial future is more aptly applied to teachers and their pension benefits.

McCabe was fired right before his 50th birthday. The timing is significant because under the Federal Employees Retirement System (FERS), law enforcement officials qualify for early retirement with full-benefits at age 50 if they have at least 20 years of service. Other federal employees who do not work in law enforcement, say at the U.S. Department of Education, aren’t eligible for this deal.

So, McCabe’s pension hasn’t been emptied out. But that isn’t to say it hasn’t been negatively affected. McCabe won’t qualify for full benefits for another 7 years, his multiplier will get bumped down, and he lost post-employment health coverage. In the end, this adds up to a considerable financial loss. According to an analysis from the Urban Institute, McCabe lost over $1 million in total pension wealth, amounting to around three-quarters of its total value.

Some have argued that it’s not worth shedding tears over McCabe’s predicament (at least in terms of his retirement), since federal pensions are generous. I’m not particularly interested in litigating how much financial loss is worthy of sympathy. However, it is fair to say that in the end McCabe still will receive a pension. And in the meantime, he likely will be able to find gainful employment elsewhere, retire again, and collect Social Security.

In some ways, McCabe is more fortunate than most teachers.

Defined benefit pension plans play multiple roles, and we have to clearly distinguish those roles in order to consider possible alternatives.
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Desperate times call for desperate measures, or so the saying goes. Staring down a financial crisis, Illinois is considering a fiscal Hail Mary: a massive fire sale on public debt. While Illinois’s finances certainly are in real trouble, issuing the largest public bond in history may do more harm than good. Here are 5 issues to consider.
People may assume that an "expensive" retirement must obviously translate into one that's also "generous" for workers. But that's not the way teacher pension plans work.

This afternoon, I spotted a tweet from a San Diego parent: 

There's something particularly wrenching about being asked what services should be cut at your kid's school to pay for increased employee pension & healthcare costs, when most working parents don't have pensions. https://t.co/Vs6uMojuSt cc @sdschools

— Ashley Lewis (@AshleyJPL) January 12, 2018

 

I followed the link to the survey, and a message from the San Diego Unified School District said it was seeking input on how to resolve a growing budget shortfall due to "increases in costs outside of the district’s immediate control, such as healthcare costs, utilities expenses, and state retirement contributions that are all expected to rise for the foreseeable future." 

In the pension world we call this "crowd out." Benefit costs are slowly crowding out the discretionary money available for states, districts, and schools to spend on other priorities. San Diego is now seeking input on what to prioritize in its cuts. Here's it's proposed list: 

Passive investing approaches could provide teacher pension plans with higher returns, lower fees, and fewer political pitfalls.