States Look to Change Teacher Pension Systems

By Sean Cavanagh — January 12, 2011 1 min read
  • Save to favorites
  • Print

Ed Week has released its annual Quality Counts report, and one of the issues we look at this year is efforts to control personnel costs in states and school districts, including pension and other retirement benefits.

As I’ve reported in other stories, concerns about the unfunded liabilities in state pension systems have received a lot more attention in recent years from governors and state lawmakers. And even if states don’t face pension shortfalls—because they’ve been paying their full bills on time—a lot of elected officials want to reduce states’ annual pension bills by asking teachers and other public employees to chip in more of their salaries to cover costs, or by reducing their benefits.

In the run-up to last November’s elections, a lot of candidates vowed to move public employees (typically new enrollees) from “defined benefit” to “defined contribution” pension plans—meaning pensions set up like a 401(k), in which benefits are tied to the market’s performance. Some teachers and unions have been skeptical of switching to 401(k) systems, viewing it as less secure (a point of view many investors might share, given Wall Street’s volatility over the past few years).

But as our story points out, switching to a 401(k) isn’t the only option on the table for states. They can also seek to reduce the benefits in existing defined benefit plans to bring down costs. That option was used in Vermont, where the state’s treasurer worked out a deal with the state’s teachers’ union that saved money. Michael Podgursky, a University of Missouri professor who’s studied pensions, argues in favor of “cash balance” plans. The cash balance option is something of a hybrid between the defined benefits and defined contribution systems, in which saving accrue gradually, based on workers’ and employers’ contribution, and savings are available as either a lump sum or annuity upon retirement. Podgursky argues that those plans would prevent “spikes” in teacher pension plans that encourage educators to stay in the profession too long, or leave before they’re ready.

It seems likely we’ll see more efforts to re-negotiate teacher pension costs at the state level in the months ahead. What kinds of changes are necessary, and which ones go too far?

A version of this news article first appeared in the State EdWatch blog.