School & District Management

A Viable Pensions Alternative: Cash-Balance Plans?

By Stephen Sawchuk — July 30, 2010 1 min read

Chad Aldeman of Education Sector and Andy Rotherham of Bellwether Education Partners have put out an interesting primer on reforms to teacher-pension plans, many of which are seriously in the red right now.

EdWeek reporters have covered some of the same issues in the past. Defined-benefit pension plans, as my colleague Michele McNeil reported, can warp the teacher workforce, potentially pushing out great teachers before they’re ready to retire and keeping less-effective teachers in the workforce.

And as I reported last year in a companion story, defined-benefit pensions also tend to disfavor certain teachers: Those who are mobile or don’t necessarily want to spend their whole career in the classroom. I also wrote a bit about a possible alternative to the defined benefit vs. defined contribution argument, a hybrid called a “cash-balance” plan. Such a plan is portable, doesn’t warp the labor market, and provides a consistent retirement return based on a set percentage of salary.

But Rotherham and Aldeman note one of the important downsides of CB plans: They’re usually invested in extremely stable funds or indexed to things like long-term Treasury notes. So while generally safer for the districts who own the plans, they’re not nearly as lucrative a long-term investment for teachers.

On the other hand, according to the authors’ calculations, they perform comparably to defined-benefit and defined-contribution plans over the first 10 years or so of a teacher’s career.

Are the tradeoffs worth considering? You tell us.

A version of this news article first appeared in the Teacher Beat blog.