Pension Theory Versus Pension Reality

By 12/16/2014

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In theory, defined benefit pension plans like those offered to 9 out of 10 teachers offer career public servants a steady stream of retirement income, adjusted for inflation as they age, that’s guaranteed to last their entire lifetime.

In practice, only half of teachers stick around long enough to qualify for any pension at all. Those that do must remain 20, 25, or 30 years in order to qualify for a pension worth more than their own contributions. And in a field with significant turnover, only a tiny percentage of teachers last a full career and qualify for the theoretical, idealized pension.

Unfortunately, too much of our debate about pensions focuses on theory rather than reality. The latest example comes from a report from William B. Fornia and Nari Rhee published by the National Institute on Retirement Security (NIRS), in which the authors attempt to estimate whether pensions or 401(k)-style defined contribution plans are a “better bang for the buck.”

The entire report is based off a theoretical teacher who works for 30 years in the same pension system. Nowhere do they consider the “bang for the buck” of various retirement options for the vast, vast majority of teachers who don’t stay in the profession that long, let alone those who move between states.

Needless to say, they’re looking at a very small slice of the teaching workforce. On the most recent national survey from the National Center for Education Statistics, only 7.3 percent of teachers had 30 or more years of teaching experience. That figure includes teachers who split careers in multiple locations; if we backed mobile teachers out, the NIRS hypothetical would represent an even smaller amount of the teaching workforce.

What would happen if NIRS looked at different types of teachers and not just the minority with 30 years of experience? They would have to account for transition costs. In real life, teachers come into and out of the workforce, cross state lines, and attempt to transfer benefits from one retirement plan to another. They can face significant penalties when they do so, on the order of half of their pension wealth. The NIRS analysis assumes away these transition costs altogether.

In the fantasy world that NIRS has created, state pension plans do a bang-up job of delivering benefits to workers. That’s just not the reality of the world we live in.  

– Chad Aldeman

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