Halting a runaway train

Michael B. Lafferty

The education field has traditionally clung to the belief
that true “professionals” are those teachers who stick with this work for their
entire careers—ten, twenty, thirty years, usually in the same school or school
system and certainly in the same state. To recruit and retain such teachers
(and in lieu of more generous salaries), school districts and states have long
depended on the ability to promise them generous benefits—including pension and
health-care plans—when they retire.

These [defined-benefit] pension
systems...are burdening state and local education budgets across the
land, particularly at a time of broader economic frailty, and at a time
when Baby Boomers are starting to retiring en masse.

 
   
 

Recently, however, it’s become clear that fewer of today’s
teachers plan to remain in the classroom (or in the state) for their entire
careers. The traditional defined-benefit (DB) pension system—which builds
retirement capital slowly at the outset of a worker’s career, and often cannot
be merged with other retirement plans after a job or geographic switch—now appears
ill-suited to the work, lifestyles, and needs of a younger and more transient
teacher population.

Besides which, the DB pension system is almost always very expensive,
and getting more so, both for taxpayers and (depending on the structure of the
plan) for its future beneficiaries. These pension systems (often unfunded or
underfunded), plus ancillary health-care costs and related benefits for
retirees, are burdening state and local education budgets across the land,
particularly at a time of broader economic frailty, and at a time when Baby
Boomers are starting to retiring en masse.

But few communities and states have yet demonstrated the
wisdom, fortitude, capacity, and imagination to devise workable alternatives
and put them into place. This major public-policy (and public-finance) problem
has been defined and measured, debated and deliberated, but not yet solved.

Except where it has been.

Halting a Runaway Train -- read it nowFordham recently set out to uncover some of these stories in
our new report, “Halting
a Runaway Train: Reforming Teacher Pensions for the 21th Century
.” Here, we
examine pension reform in federal, state, and local governments; a private
company; a university; and four charter schools. (We also offer a handy primer
on defined-benefit and defined-contribution [DC] plans.) What do we take away
from these cases? Three lessons emerge.

First, this is messy, complicated work, fraught with
challenges
. Yet smart organizations can prepare for them. The
organizations that enacted the most dramatic and efficient pension reforms were
those that moved proactively, prepared their employees for the shift, and
mustered hard data to document their assertion that the status quo had become
unsustainable and change was therefore unavoidable. In almost every case we
examined, the greatest challenge in enacting pension reform was to convince
current employees that change was necessary and that it would not be
detrimental for them. Those organizations that managed the smoothest transitions
gauged employee sentiment at the outset and informed employees of new
developments and potential outcomes well before any change took place. They
also effectively demonstrated to their employees that inaction would lead to
even more dire consequences—at best, layoffs and other budget cuts, and at
worst, the dissolution of the organization.

Second, cost savings from pension reform may be real but
not immediate.
One of the strongest criticisms that opponents can hurl at
pension reformers is that changing plans may actually cost more in the near
term. That’s because, without new employees to subsidize lingering DB plans,
the employer is suddenly on the hook for more costs going to support today’s DB
retirees and any current employees who remain in the DB plan. One way to ease
those costs is to shut down the DB plan entirely and include existing as well
as new employees in the new plan. But as several cases in this volume show, the
stormy political climate surrounding reform—even in private institutions—does
not often tolerate such sweeping moves (and placing all employees, especially
those near retirement, into a new DC plan may not be fair). In any pension
switch, the ability to show how pension reform can save thousands, millions, or
even billions of dollars down the road is pivotal. This is true not only before
the reform takes place but in the years after; in many of the cases we
examined, opponents to the reforms remain vocal to this day, well after the new
plans have gone into effect.

Third, employers
need not choose between saving money and disregarding employee concerns.
Though
most organizations examined in this volume adopted new retirement plans in
order to save money, many took pains to minimize real or perceived harm to
their employees. That doesn’t mean avoiding all pain—a key goal of pension
reform is to shift some investment risk and expense from employer to employee,
and most every transition documented within these pages did so— but employers
can take actions to keep that discomfort within reasonable bounds. Some
organizations reinvested savings elsewhere—e.g., one charter school raised
teacher salaries and bonuses, while another employer used savings to hire
investment counselors for its employees. Others found ways to overlay different
plan components into a blended retirement system so that employees would
benefit from a menu of options and be somewhat protected from investment risk.
Utah, for instance, instituted an innovative hybrid plan that offers employees
DB-style protection while capping state contributions.

At the end of the
day, saving money in and of itself is not the ultimate aim of any reform;
rather, saving money is a means to stabilizing an organization and making it
stronger, healthier, and more productive—all of which is good for the
organization’s present and future employees, too.

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