Yesterday, the New Jersey pension committee released a report proposing an overhaul of New Jersey’s pension and healthcare benefits. Although there are disconcerting aspects for existing workers that need to be addressed, unlike most reform proposals, the changes look promising for new teachers. Three big pension proposals that impact teachers from the report to highlight:
- Freeze benefits for all existing workers. Existing workers would keep all benefits already earned up until a set date. After that date, any benefits accrued will be under a new cash balance plan (see below). At retirement, workers would have a mix of pre- and post-freeze benefits.
- Move all new hires and existing workers (after the freeze date) into a cash balance plan. Cash balance plans pull elements from both defined benefit and defined contribution plans. In contrast to back-loaded traditional defined benefit plans, a cash balance—also known as a smooth accrual defined benefit plan—accumulates wealth at a constant rate. This means that early career teachers, who usually gain little to no benefits from traditional plans, can receive more benefits from the start. Unlike defined contribution or 401ks, workers are not responsible for making investment decisions, and hence do not bear all the risk, and can take their benefits with them as a lifetime annuity. The stickier issue will be whether existing workers can be moved into this plan, and the report has subsequently recommended passing a constitutional amendment allowing the modification of existing benefits.
- Give mid and late career workers additional pay credits or use a graduate pay credit scale. These carrots are offered as ways to make up for the loss in benefits that mid-career teachers may experience from switching plans. Normally, mid-career teachers who stay will receive a bigger bump in pension payments as they reach the end of their careers. Graduated pay credits would reward long-term service by paying workers increasing pay credits at various career milestones (i.e., a 3 percent of pay credit at 10 years, 4 percent for 20 years, 5 percent for additional years beyond 20 years).
Typically, pension reforms whittle down benefits to meagre levels without regard to effects on human capital, especially new hires. In New Jersey, a “non-forfeitable rights” statute protects existing workers from cuts. Meanwhile, any reform cuts have been issued solely to new tiers of teachers while benefits for existing workers, compounding existing inequities in the current system. New tiers essentially subsidize the benefits for past tiers in what the commission calls an “upside down wedding cake” system: multiple tiers of existing workers with protected benefits on top of a few tiers of newer workers who bear the brunt of the cuts.
New Jersey Teachers and State Employees Benefit Protections
Source: “Report of the New Jersey Pension and Health Benefit Study Commission,” February 2015.
While there are only a few winners and a much larger pool of losers in the current system, a cash balance plan would allow more teachers to gain secure retirement benefits from the onset of their careers. And while the decision to place existing workers into the plan and likewise the proposal to transfer oversight to unions rests on much shakier ground and likely to be challenged, the changes for new workers, if implemented well, could mean significantly better benefits for many of New Jersey’s teachers. After a history of pension missteps, New Jersey may be moving in the right direction.
*To read about the New Jersey pension commissions’ first report on the state health and benefit systems’ fiscal status, see here.