Teacher Pensions Blog

Ezra Klein has a good post laying out some of the issues around public-sector workers and their retirement benefits, but I want to amplify two of his points. The first is around some of the overblown rhetoric going around right now (epitomized by this David Brooks column that was Klein’s inspiration in the first place) suggesting that public-sector defined benefit pension plans are causing massive holes in state budgets. In our report on teacher pensions, we write:

A historical context is also useful. While the current funding ratios are less than ideal, they are not catastrophic. The most recent figures from the Public Fund Survey, a compilation of 101 state and municipal retirement plans, show that the aggregate funding ratio for these plans reached a high of 102 in 2001 at the end of the Internet-led bull market.Through a combination of poor investment returns and benefit enhancements, the ratio had fallen to 85 by July 2008, about where it was in 1994.

In other words, after the longest bull market in history followed by one of the worst decades for investment returns on record, we’re in roughly the same position we started in.  That doesn’t mean the financial problems with teacher pension plans are insignificant–and the political incentives to raise benefits during boom times skews things here–but it is useful to view them in an historical context (I might argue some of the non-financial problems are actually more important).

The second point worthy of amplification is when Klein writes:

And while states are facing serious pension problems because they still offer defined-benefit pensions, we’re also going to see the retirement of millions of private-sector workers who don’t have defined-benefit pensions, and either haven’t contributed enough to their 401(k)s or saw their wealth wiped out in the recent turmoil. We’re facing a pension crisis in the public sector, but we’re also looking at a retirement crisis in the private sector.

This is spot-on. As we get closer to the mass retirements of workers who’ve never had a defined benefit pension plan, something that will be upon us in the coming decades, we really have no idea what to expect. Preliminary research suggests it’ll be downright ugly:

A 2007 GAO report found that, among workers aged 55-64 with a current or former DC plan, the median account balance was $50,000, a sum that would convert to an annual benefit beginning at age 65 of just $4,400.

Individuals are fallible. They don’t know how much to save, they don’t know what to save in, they park too much of their money in too-risky or too-safe investments, or they cash out too early. We’ll know more about how these things played out in the grand defined contribution experiment in the coming years. 

This blog entry first appeared on The Quick and the Ed.