What’s the greatest threat to quality public education and public services? According to some, it’s the secure pensions that public workers and teachers receive as part of their compensation.
One writer recently said that these pensions are “threatening the fiscal health of many states.”
And politicians seem to heeding this warning. Susan Combs, Texas Comptroller for Public Accounts, recently told a San Antonio Rotary Club meeting that a number of bills would be introduced in the next session of Legislature that would establish a two-tiered retirement system for Texas’s state employees and teachers.
One tier would be for current employees, who would remain in the traditional defined benefit pension plan in which retiree benefits are based on salary and years of service.
The other would be for new hires, who would be shifted into private defined contribution plans like a 401(k). Their benefits would be determined by the amount of money in their private account upon retirement.
Combs made the comment in the context of finding ways for the state to save money as it faces a budget shortfall of $21 billion over the next two years.
And in January, the Texas House Committee on Pensions, Investments, and Financial Services will issue a report recommending that the Texas Legislature consider the possibility of creating a two-tier pension system for current and newly hired teachers and state employees.
The pension committee’s report doesn’t cite any potential cost savings. It does say that the state employee and teacher pension plans are well-managed, have recovered from the market crash, are well-funded, and are well-positioned to provide employees with a secure pension.
Inexplicably, the report goes on to say that “there is significant interest in reforming Texas public pensions, particularly in light of current market conditions” and recommends that the state Legislature study the impact of shifting newly hired teachers and state employees into private defined contribution plans.
Or to put it another way, the Legislature should study the impact of shifting the risks of a volatile market onto newly hired teachers and state employees.
“Our defined benefit plan benefits all Texans,” said Tim Lee, executive director of the Texas Retired Teachers Association at a recent meeting of the Texas Teachers Retirement System board of trustees. “And we oppose any plan that may interrupt benefits for future educators.”
The problem with relying solely on defined contribution plans for retirement security is that they make retirement less secure and don’t save money.
According to the Employee Benefits Research Institute, workers between the ages of 45 and 65, whose sole retirement plan is a defined contribution plan “have about a 45 percent chance of running short on cash” ten years after retirement.
Time magazine ran a long account of the problems faced by retirees with defined contribution plans that you can see here.
As for saving money, the National Institute on Retirement Security in a report entitled A Better Bang for the Buck found that “the cost to deliver the same level of retirement income to a group of employees is 46 percent lower in a [defined benefit] plan than it is in a [private defined contribution] plan.”
And it’s not just future educators and state workers who would suffer if new hires are diverted away from the defined benefit plan. Doing so “would decrease state contributions to the defined benefit plan, [which would] require decreased benefits,” said Lewis Ward of Gabriel, Roeder, Smith, and Company, which prepared TRS’s 2009 actuarial valuation.