Public Pension Plan Designs Are the Problem, Not Pensions Themselves
© Dreamstime.com

Commentary

Public Pension Plan Designs Are the Problem, Not Pensions Themselves

If you build a pension system with risk management in mind, you can avoid the common pitfalls that have led to the over $1 trillion in U.S. public pension debt.

Daniel DiSalvo’s commentary in the Wall Street Journal — “Teachers Want Higher Pay, but Pensions Swallow Up the Money” — highlights a serious issue facing states and municipalities across the country: more and more public education dollars are being diverted away from K-12 classrooms and teacher salaries to pay the rising costs of underfunded teacher pension systems.

The consequences of servicing escalating pension debt do not end there; the problem means school districts have less money to invest in facility upgrades, technology, enrichment programs in high-need communities, and more.

However, Dr. DiSalvo’s proposed solution—a notional trade where teachers agree to pay increases in exchange for shifting to defined contribution retirement plans, effectively giving up their traditional pensions—is both unrealistic and unnecessarily limiting.

Pensions themselves are not the problem, it’s pension plan design.

While many—most, even—teacher pension systems are underfunded, it’s usually because of design features in the benefit structure, amortization and funding methods, and assumption setting practices that have left these systems exposed to risk and underfunding. Wisconsin, South Dakota, New York and other states with well-funded pension systems prove if you build a pension system with risk management in mind, you can avoid the common pitfalls that have led to the over $1 trillion in U.S. public pension debt.

And while defined contribution plans certainly have the appeal of potentially minimizing financial risks to taxpayers and government employers, design matters there too.

Our recent analysis of Florida’s state retirement system, for example, found that the defined contribution plan teachers there have been defaulted into since 2016 is using contributions way too low to provide adequate retirement security for public educators.

Rather than replace a one-size-fits-all plan with another, it would be better to follow the lead of states like Michigan and Pennsylvania which have recently adopted pension reforms that give teachers choices between plan designs (e.g., pensions, defined contribution plans, hybrids, etc. )—and devise each plan structure to be risk-managed and stay solvent even in down markets. Then each teacher can self-select the best plan for them.

These reforms, along with an ongoing commitment to pay down legacy pension debt, are a more politically palatable and feasible approach for teachers and stakeholders. This approach would allow policymakers to directly address the issues Dr. DiSalvo correctly spotlights, and the only way we avoid passing yet another self-generated problem to our children.

Leonard Gilroy is vice president of government reform at Reason Foundation, a nonprofit think tank advancing free minds and free markets. He also serves as senior managing director of the Pension Integrity Project at Reason Foundation, which assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.

Steven Gassenberger is a policy analyst with Reason Foundation's Pension Integrity Project.