Teacher Pensions Blog

Last week The New York Times ran an op-ed from Boston University law professor David Webber with the click-bait-y headline, "The Real Reason the Investor Class Hates Pensions." I work for a nonprofit and don't consider myself part of the "investor class," but Webber's piece is a mishmash of one solid argument undermined by several weak ones. 

Webber's best and main argument is that public-sector pension plans provide a large source of capital to exert pressure on companies. According to his bio, Webber is writing a book on this topic coming out next month, and his op-ed is on firm ground when he points to instances of shareholder activism that led to more progressive policies and better corporate governance. 

But he buries those examples amid a slurry of ad hominem attacks and a foggy understanding of what public-sector pensions are and do. Teacher pension plans are already in bed with Wall Street; the “retirement security crisis” narrative ignores data showing that elderly Americans are doing better and better; today’s defined benefit pension plans just don’t work that well for most teachers; and the costs of today's pension plans are enormous and are affecting schools and other public services.

But Webber’s biggest sin is he confounds the multiple roles that defined benefit pension plans play. They have many functions, among them:

Role #1: Provider of retirement benefits. When most people talk about public pension plans, they typically mean traditional "final average salary" pensions that deliver benefits through a formula based off years of experience and salary. As we and many others have documented, those formulas deliver benefits through back-loaded patterns that highly reward 20- and 30-year veterans while putting everyone else at risk of retirement insecurity. There are alternative models that offer much smoother benefit accumulation patterns that would protect all workers, including a type of defined benefit plan called a "cash balance" plan. The benefit accumulation function of retirement plans is distinct from other roles it plays. 

Role #2: Investor. In addition to deciding how to deliver benefits, retirement plans also have to decide how to invest. They employ many individuals whose job is to decide how their state's pension plan should invest their capital. This is the role Webber seems to be most interested in, but it's distinct from the benefit role, and any retirement plan could make any investment decisions they choose. As an example, the California State Teachers' Retirement System (CalSTRS) could turn itself into the CalSTRS Investment Group and the state could require all teachers to invest their money through it. All of the political activism Webber highlights could continue (if that's what the members wanted with their investments), but the benefits could be delivered in some other fashion than the current design. In fact, CalSTRS already does this through a cash balance plan offered to certain types of school employees. 

Role #3: Risk-taker. Under traditional defined benefit plans, the employer takes on most of the risks. The employer decides how much to save and where to invest, and bears the burden if their assumptions are wrong or if the stock market under-performs. Contrary to Webber, who implies that the "investor class" is somehow afraid of the role public-sector pension plans play in investments, my sense is that most people who care about public-sector pensions are primarily concerned about the risk-taking role. On one hand, taxpayers are worried about politicians who consistently over-promise and under-save for pensions, while workers like the idea of being protected from investment risk. From my vantage point, I find the cost arguments frustrating and at times mis-diagnosed, and I don't think workers fully appreciate the risks they do face, such as the risk that they might leave before they qualify for decent benefits, or the hidden costs that get passed down to them over time through lower salaries and worse retirement benefits. But again, there are ways to structure retirement plans to more adequately share risk between employees and employers. 

Role #4: Provider of annuities. Webber doesn't mention it, but a fourth distinct role comes in the draw-down phase of someone's life. After they've accumulated assets during their working years, they need to figure out how to spend down their assets during retirement. Under current DB pension plans, the state takes responsibility for sending out monthly checks. Under most 401k plans, individuals have to make their own decisions about how much to withdraw and when. Any individual could decide to turn a lump sum amount of cash into an annuity that functions like a traditional pension, but states could also help out here by providing annuities to their workers as a way to help them make smarter decisions during the critical spend-down phase.  

In order to think clearly about public-sector pension plans, we have to clearly distinguish what function we're talking about and why. Webber's main work appears to be focused on the "Investor" role as I've described it above, but his op-ed confused that role with other functions that pension plans play.