PIE Network Guest

Pension and retiree health care costs are likely to consume increasingly large portions of education budgets in coming years, crowding out programs to improve the nation’s schools. State teacher retirement systems face a shortfall for pensions and retiree health care costs estimated at $1.2 trillion to $4.43 trillion.

Moderator Chris Tessone said some experts believe each household would have to pay two to three thousand dollars a year more in taxes for 30 years to make up the gap in pensions and health care costs. “Most pension systems assume an 8% return on investments, which is too optimistic,” he said, explaining that pension funds typically invest in stocks and real estate, which are likely to return less in the future than they have traditionally.

Tessone said it comes down to an issue of fairness: How can teachers plan for retirement if they don’t know if they will get the full payment they expected? “Teachers cannot gauge whether the promises being made to them are credible,” he said.

Redefining pensions

Raegen Miller of the Center for American Progress discussed a new report he authored, Redefining Teacher Pensions, which argues that pensions should complement other compensation policies to improve the quality of the teaching workforce and the distribution of its talent

He said a key question, which his paper does not address, is determining the appropriate level of contribution to the system. “Actuaries and financial economists will never agree on this,” said Miller.

“We must respect promised benefits,” said Miller. He argued that if policy makers dial back promised benefits to teachers, it will discourage talent from going into teaching.

Miller presented three major recommendations:

1. Prevent imprudent benefit enhancements if markets rise. He suggests state constitutions be amended so that any benefit change is subject to a cooling-off period so legislators can listen to many different voices before voting.
2. Create a new fiscal requirement in ESEA penalizing an agency’s Title 1 allocation in proportion its failure to make actuarially required contributions.
3. Redefine pension benefits for new teachers using a cash balance approach.

“On its own, pension policy is a weak lever for improving the quality of the teaching workforce. It’s easy to lose sight of this because back-loaded benefits create strong incentives for seasoned veterans, including chronically ineffective ones, to stay in the classroom,” said Miller. “We need a pension policy that makes sense in combination with other compensation policies.”

Miller said that teachers who only work in a district for two to three years never get vested, so there’s no year-to-year incentive to stay in teaching. And because benefits are tied to a teacher’s career peak salary, so Miller said salary growth for newer teachers needs to come from the pockets of more experienced teachers. “Back-loaded benefits are the linchpin in the backbone of teacher compensation,” he said.

Miller said there are several strategic advantages to creating a cash-balance defined benefits system. It would:

• Augment pension-based retention incentives for early career teachers.
• Provide a better match to multiple, mobile career expectations, which are becoming the norm.
• Erode the focus on peak salary, thus facilitating salary policy reform.

Miller said the major obstacles to that approach are:

• Fear of inadequate post-retirement income for new teachers that plan to stay in teaching
• Popularity of defined contribution system
• Misplaced fear around conversion costs
• Misplaced fear of age discrimination

Protecting classroom spending in Massachusetts

Linda Noonan, who leads the Massachusetts Business Alliance for Education (MBAE), discussed how MBAE became involved in health care reform in Massachusetts in order to keep education dollars from being diverted away from students. (MBAE’s budget analysis, School Funding Reality: A Bargain Not Kept, was cited by many state legislators as the evidence that led them to vote for reform.) “On the issues of pension and healthcare reform, we have to stop talking about teachers and start talking about classrooms,” Noonan said.

She suggested that grassroots advocacy groups interested in advancing reform should work with a business group and approach legislators together to explain the issues. Noonan said MBAE’s coalition was dispassionate in its approach. “We said, here is a solution—we suggest you take it, but if you have a better idea we are happy to hear it,” she said. Noonan said the effort was successful, with the law changed so that municipalities have the ability to join the state’s purchasing group or an equivalent consortium to lower their employee health insurance premiums, and municipal retirees will now go into Medicare.

“An education advocacy group can find itself needing to advocate on issues not teacher or student related that involve getting part of the pie,” said Noonan.

Educating teachers on pension reform

In the question and answer period, the panelists discussed the importance of educating teachers about the need for pension reform. “Young teachers need the facts—women live longer and they tend to be poorer in old age than men,” said Noonan.

Half-kidding, Miller said there should be a labeling law. “Every tall latte should have a label saying you should be putting money into your retirement account.”

Tessone said teachers should be presented with cost comparisons. “I don’t think that teachers understand the costs of the systems and why they cost what they do,” he said. “

Miller agreed, saying, “If someone is going to be an outstanding first grade teacher they might have certain qualities, but having investment skill and keeping track of the markets might not be part of those.”