There a number of myths surrounding public pensions and defined contribution plans. In this report, Josh McGee uses empirical evidence to debunk common claims around the supposed structural efficiencies of traditional public pensions.
What are common claims about traditional defined benefit plans (DB) versus defined contribution plans (DC)? Critics often claim that DB plans achieve better investment returns at lower fees and are better for worker retirement security because DB plans offer annuities.
In terms of retirement benefits, now is the worst time in at least three decades to become a teacher. After years of expansion, a number of states enacted legislation cutting benefits for workers in response to financial pressures. The cuts fall hardest on new and future teachers, particularly for teachers hired after the recession who do not plan to teach in the same state for 30 or more years.
A report from author Andrew Biggs finds that transition costs should not prevent state or local governments from closing old pension plans and switching to a defined contribution, cash balance, or other hybrid plan.
In this working paper, Fitzpatrick finds evidence that public sectors workers undervalue their pension benefits relative to the cost of providing them. In response to a 1998 surplus in pension fund assets, Illinois allowed late-career public school teachers to buy upgraded, more generous retirement benefits. However, on average, teachers were willing to pay just 20 cents of their current compensation for a dollar of future retirement benefits; hence, these teachers preferred current wages over pension wealth by a factor of five-to-one.
Politicians and advocates for pensions argue that they boost increase worker retention, and that enhancements to pension plans will further boost retention. This working paper from the Center for Analysis of Longitudinal Data in Education Research (CALDER), however, could not find any evidence that this theory played out after St. Louis enacted a large pension enhancement for public school teachers. In 1999, the St. Louis teacher pension plan boosted benefits with an immediate 60 percent increase in pension wealth for all workers.