Pensions are for survivors.
That's the first thing that struck me when reading the National Public Pension Coalition (NPPC) short report, “Why Pensions Matter: The history of defined benefit pension plans in the United States of America.” It starts out like this:
Pensions, in the broadest sense of the term, have existed since ancient Rome. Soldiers in the Roman army could earn pensions through their military service. The value of these pensions to Roman soldiers helped to maintain the power of emperors such as Augustus. Pensions for military service have continued to exist in one form or another in the two thousand years since.
This is true as far as the history goes, but it’s a telling anecdote, because it's a reminder that pensions benefit survivors. In the past, that meant surviving war. Today, that means remaining in one profession and one state for an entire career. State pension plans assume that less than one-in-five teachers will survive long enough to truly benefit from today’s back-loaded teacher pension plans.
The report is a few months old now, and it has some useful historical notes, but it also includes a number of attempts to gloss over the true history of retirement savings in this country. To show where the NPPC's history bleeds into a false nostalgia, I’ve pulled out a few sections below and annotated where the report goes wrong:
During the postwar economic boom, defined benefit pensions represented the closing chapter of a solid middle class life. The American dream was a steady job with a middle class salary, decent benefits, and the promise of a pension in retirement. For many, but not all, Americans this dream was a reality. A worker with a high school education could get a job on the line at a steel factory and live that middle class lifestyle. Other workers found job security and a good salary through serving their community as a teacher or firefighter or librarian. For a period of time, pensions were accepted as a key element of middle class life in the United States. This started to change in the 1980s.
The words "promise," “dream,” and “could” are doing a lot of work here. As I’ve written before, it’s a myth that there was ever some sort of “golden era” where all workers had access to a secure retirement. In the early 1980s, only 43 percent of new retirees had any retirement benefits other than Social Security. That was before pensions began to decline and the 401k began its steady ascent, and yet most Americans still did not have any retirement benefits.
Moreover, retirement income was highly contingent on income. During the peak era for defined benefit pension plans, only 22 percent of retirees in the bottom quartile had any retirement income other than Social Security, compared to 64 percent among those in the highest quartile.
In other words, while it was theoretically possible for anyone to graduate high school and earn a factory job with a pension, there just weren’t that many people who were able to take advantage of that dream. There are lots of reasons for this—there weren’t that many factory jobs to go around, those pensions required long vesting periods of 10 or 20 years, and lower-income workers have higher turnover rates—but suffice it to say that the NPPC’s history is overly rosy on this front.
They go on:
Critics of public pensions often complain that these pension plans have long vesting periods and reward the longest serving employees. That is intentional. In public education, for example, most research points to teachers dramatically increasing their effectiveness during their first few years of teaching and then maintaining that effectiveness throughout their career. They do not lose their effectiveness the longer they continue in their profession. They are more likely to continue teaching at their peak effectiveness rather than decline. Structuring retirement plans to reward teachers that only teach for three or four years does not make sense because that would reward teachers who leave before reaching their peak effectiveness, often to be replaced by someone without any experience. Similarly, with firefighting and policing, there are a lot of sunk costs that go into training new recruits. It is not in the interest of these departments for their new employees to leave right after training, so their pension plans are structured to promote long-term commitment to the profession.
It’s noteworthy to see a union-backed coalition like the NPPC make their priorities this explicit. They’re essentially admitting that they only care about retirement security for those “committed” to the profession. But, because pensions don’t provide positive benefits to teachers until they’ve served for 20 or 25 years, the NPPC’s definition of “commitment” excludes the majority of people of people who enter the teaching profession. To extend the metaphor, they really only care about the survivors in a war of attrition. They’re also overstating the teacher effectiveness research a bit, but, regardless, as a matter of public policy affecting millions of workers, we should work to ensure they ALL have retirement security.
Later they state:
State and local governments offer defined benefit pensions to their employees in order to attract the best and brightest to public service. Public employees earn less on average than their counterparts in the private sector, so job benefits like pensions are a proven way to recruit top talent. Also, as discussed above, pensions play a key role in retaining employees in professions like teaching and firefighting.
This claim is not backed by research. To begin with, we don’t have good evidence on how much pensions affect teacher recruitment. Some teachers might choose to teach because of the promise of a pension, but the long wait for a decent pension also might deter some qualified candidates. Moreover, extremely high (and rising) pension costs have played a role in keeping teacher salaries flat in recent years, and those costs have also contributed to large cuts in pension benefits for new teachers.
We do, however, have evidence on pensions as a retention incentive, and it's not nearly as positive as the NPPC claims. As Kelly Robson and I showed in a recent report for Education Next, state pension plans themselves do not assume that qualifying for a pension is enough to alter teacher behavior. At the back end, pensions do have a retention effect on teachers nearing retirement age, but that comes too late to affect teacher retention rates very much. Moreover, if we care about keeping veteran teachers, then we should be concerned about the much larger “push-out” effect that pensions have on teachers who reach the normal retirement age.
Later they revisit the broader argument about retirement security:
In the private sector, the shift from defined benefit pensions to defined contribution 401(k) plans over the past three decades has harmed the retirement security of working families. This is because most working families accumulate far less in retirement savings with a defined contribution plan than they would with a defined benefit pension.
This claim seems like it could be true, but it's not. As discussed above, there was no golden era of retirement saving. In fact, researchers have looked at multiple sources of data and found that today’s retirees are doing at least as well, if not better, than prior generations. (Lest you think anyone is cherry-picking data, the links in the prior sentence will take you to work published by the U.S. Census Bureau, the conservative National Affairs magazine, and the left-leaning Mother Jones.)
That doesn’t mean problems don’t exist—about half of all workers today still do not have access to a retirement plan at their jobs—but pension advocates are seizing on the problems of today in order to make a case for a past that never existed in the first place. It's understandable that as a trade group representing large pension plans, the NPPC doesn't want to have a conversation about why public-sector retirement plans like those offered to teachers are getting worse over time, while those offered in the private sector keep getting better. But that would be a more complete reading of the history.