Pensions for Public Employees

Eduwonk has an excellent list of the top issues in education policy. One of the big debates surrounds teachers' pensions. Rotherham writes,

The sustainability of teacher pensions has emerged as a major fiscal issue for states.  A few years ago the warnings about pensions were coming from just a few wonks, now policymakers in most states are paying attention to an overall pension shortfall of more than half a trillion dollars (double that when health care is factored in).  At the same time there is growing awareness of how the current pension systems shortchange many teachers – especially mobile ones and career shifters – and contribute to America’s broader retirement security problems.  Even absent a headline-grabbing fiscal crisis pensions will make news this year as policymakers try to sort out how to meet the different goals of fiscal sustainability, adequate retirement benefits for workers, and adapting relatively static pension systems to the more dynamic teacher labor market today.

The issue of pensions, not just for teachers, but all public employees, is a big issue here in New Jersey. The state has failed to contribute funds to the pension program, and many fear that the state will never be able to meet its obligations. There's more on the state's screwed up fiscal situation and its debt related to pensions here.  

Talk to anyone, even the most left-leaning voter in this state, about this topic, and the conversation quickly gets bitter. Most people love their local teachers and want them properly compensated, but the high property taxes and the behavior of top administrators makes many seeing red.

There is a suplus  of top education administrators in this state. Towns, which are unusally tiny compared to the rest of the country, each have their own superintendents who are responsible for two or three schools. Some towns are so small that they don't even have their own schools, but still have a superintendent. Those superintendents receive large salaries. Think $200,000. When they retire, they are entitled to their full salary and then can take on another position where they recieve another 6 figure salary. Local police chief can retire at age 55; some bring in $300,000. They are also able to double dip. 

Until the situation improves, we are going to continue to have a Republican governor in this state. 

I'm curious what my non-New Jersey readers think about this situation. 

20 thoughts on “Pensions for Public Employees

  1. I’m still repressing knowledge of Pittsburgh’s pension situation. I’ve seen people talking about Pittsburgh pensions using figures like you might see in New Jersey or California, but we’re going to be unable to pay pensions of $2,000/month. That’s for city employees, teachers do better. The city pension plan is still assuming 8% annual returns because apparently that is better than admitting insolvency.

  2. I didn’t take the pension when I was hired. I took the TIAA CREF option. For a while when the markets tanked it looked like I made the wrong decision…now I’m looking prescient.
    Isn’t California a different problem, in that teachers don’t pay into social security and don’t get it when they retire? Since they don’t have soc sec, Calif needs to be very careful about cutting their pensions.
    I don’t know what’s to be done while remaining fair to people who counted on receiving a certain amount when they retire. I’m sure that their financial plans were made assuming they would receive that money. But I do think there should be changes made going forward. No more retirements at 55 (though sometimes retirements save money–they are always trying to get faculty to retire where I work because apparently it’ll save money). Laws against drawing a pension while you are working at another government job. No double pensions.
    The one issue that does affect me–retirement health care. They are trying to take that away for new hires and give them a set amount of money per year while they are young that they can save and then use to buy medicare gap insurance after they retire. Not sure how I feel about it, but the union is dead against it.

  3. LisaSG said:
    “I didn’t take the pension when I was hired. I took the TIAA CREF option. For a while when the markets tanked it looked like I made the wrong decision…now I’m looking prescient.”
    There’s a lot of boo-hooing that goes on over the disappearance of the traditional pension, but pensions are inherently dangerous because it’s harder to manage risk. If it works, it’s great, but if it doesn’t work, all your eggs are in that one basket.

  4. Amy P–yes, when it’s a pension, the money’s not really yours, is it? I like knowing that if I were to die, God forbid, my retirement will belong to my husband and/or kids, because it is already my money.
    It helps though that to compete with a pension my institution has to put a lot into TIAA CREF. More than double what my husband gets from a private school. I suppose they may cut down on the percentage of my salary they’re putting in, someday; but not now, while they’re trying to get people out of the pension system.

  5. I am a left-wing liberal who isn’t in NJ (or CA, where I’ve also followed similar horror stories about pensions, some of which include faculty members at the UC who I know, and who have definitely been gaming the system to optimize their retirement — a classic gambit is to up your salary with non-institutional funds and then have that salary be set as your retirement salary). My take on the situation is that I worry that “pension queen” examples are being used to undermine promises made to run of the mill employees, and, alternatively, that the rules that make it impossible to change the 300K pension (which deserves a cite, just like a welfare queen would) end up resulting in Republican governors (which is a bad thing). Now, I’d like to believe there isn’t a 300K pension, but if there were, I’d be perfectly comfortable capping the pension. The problem is that I don’t want that to undermine the pension for others who were promised reasonable compensation (and I don’t know what’s reasonable. Is 100K reasonable?).

  6. PS: Oh, and a cite for my “pension queen” story:
    http://www.businessinsider.com/california-pension-nightmare-worsens-2012-5
    Bruce Malkenhorst has been tried (and his pension slashed: http://articles.latimes.com/2012/may/31/local/la-me-vernon-pensions-20120601.
    Joaquin Fuster & John Schalg are both former UCLA professors, Julis Schachter a UCSF employee. All of them were (potentially legitimately) paid with foundation/grant/endowment funds before they retired (they are important people in their respective fields). But, their current salaries are funded by CalPERS, and, are undermining the ability of the system to pay everyone and providing political fodder to those who want to destroy the system to save it.

  7. Also, I believe that everyone needs retirement that isn’t tied to personal savings because I don’t think savings yields are reliable enough over the periods people need them (i.e. it’s a myth to predict any rate of return in an individual retirement account); Higher paid employees could just save a sufficient portion of their income to fund their retirement (which, I think, would need to be on the order of 35% of their income, if I assume 0% yield). But, lower paid employees can’t do that.
    Social Security works for me as that guaranteed entitlement retirement income (which balances yield/budgets) over more people and more years.

  8. CA teachers don’t get Social Security. They can transfer between school systems within the state, and bring their pension with them. (I don’t know anyone who has actually done it, but people talk about using that to their advantage — teach and live in a low cost of living area that you love, then for your final two years, rent a house and teach in somewhere with higher salaries. Then retire back to your low cost of living area. The final pension is based on years of service and final salary and would get significantly boosted.) School districts want people to retire because then THEY don’t have to keep paying them, but it’s harder on the pension system to have people retiring at 58, 60, whatever. And in many cases it’s a loss to the school system in terms of knowledge, expertise, etc (the old bitter teacher stereotype is occasionally but not regularly true). They should raise the age of full benefits for sure.
    My husband changed careers after 15 years of teaching, and is now working full time at another job. We have started receiving his pension because there was no financial advantage to wait any longer (he’s in his early sixties; they stopped increasing the amount he’d receive each month at age 62 — unlike SS where it’s to your advantage to wait). I don’t trust that the money will stick around and wanted to get as many years of it as we can. We love the monthly check, but I have planned our retirements with the assumption that it may disappear at some point, and I worry about friends who are two-teacher couples and that’s all they’ve got.

  9. Have republican governors done anything about the fact that New Jersey has too many small administrative districts with too many layers of inefficient, over-lapping services and administration? When I lived in Philadelphia, and heard a lot about New Jersey politics, I didn’t see Cristy doing much about that, but perhaps I’ve missed it. If republican governors are not doing anything about what seems to be the big problem, why should anyone vote for them? Are they just dumb?

  10. I suspect we will end up with something like the ERISA system of handling failed pension systems. Not a bad way to go: caps the benefit, so Malkenhorst and Fuster and Schalg get a hell of a haircut and the school janitor from Lodi who was getting $40K keeps getting most of that. Getting to there from here is going to be brutal. Dems seem to be working on it in Rhode Island, so it’s not just Reeps who are willing to do the heavy lifting.

  11. “I suspect we will end up with something like the ERISA system of handling failed pension systems.”
    Seems like a reasonable plan, except for the legal logistics. I can’t remember when ERISA started, but it’s a pretty complex program, with requirements and preconditions and planned outcomes. The problem with the public pensions (CalPERS, but others as well) is that promises were made without taking the contingencies into account. And, if in order to make the cuts the whole system has to be driven into bankruptcy there are a lots of consequences other than docking the pay off retired UC professors.
    (BTW, Malkenhorst is part of the Bell city scandal (Bell was trying to follow in Vernon’s footsteps) — a city with a population of 100 or so that was set up to take advantage of municipal energy rates and co-opted as a personal fiefdom; the scandal was exposed by the LA Times).

  12. Yeah, Gina Raimondi is considered a god in RI right now (Dem State Treasurer under Chafee). Also, Dem Angel Tavares has taken on some union sacred cows while still maintaining a fairly progressive agenda overall. If only Nixon could go to China, perhaps only Dems can institute good pension reform.
    Re pensions, I have a big problem in that I cannot deal with the idea that you have to plan for how long you will live after you retire. That seems so wrong to me. My MIL had big plans for her retirement, then died the day she retired. I guess I am personally fortunate she had a diverse retirement portfolio (some pension, but a lot of IRAs) because we inherited what she never got to use. But it just seems wrong that my retirement portfolio is pretty well set simply because she died early. I have a lot of guilt over this.

  13. bj said:
    “Also, I believe that everyone needs retirement that isn’t tied to personal savings because I don’t think savings yields are reliable enough over the periods people need them.”
    Likewise, if the economy is in trouble, tax revenues will plummet. The uncomfortable truth is that everything is unreliable, because the success or failure of any particular strategy depends on the health of the state, national and world economy. Even borrowing to pay for Social Security won’t be an option if nobody wants to lend us the money, or if they aren’t in a position to do so.
    Wendy said:
    “I have a big problem in that I cannot deal with the idea that you have to plan for how long you will live after you retire. That seems so wrong to me. My MIL had big plans for her retirement, then died the day she retired. I guess I am personally fortunate she had a diverse retirement portfolio (some pension, but a lot of IRAs) because we inherited what she never got to use. But it just seems wrong that my retirement portfolio is pretty well set simply because she died early. I have a lot of guilt over this.”
    Try not to feel bad about it. Your MIL was not the worse off for not actually getting to do the stuff she planned to. At least half the fun of a vacation is planning it, and if she was a generous grandma, she would be very pleased to see that the younger generation was doing well. Also, hopefully, she benefited from having greater peace of mind about her future than she would have without the money.
    (If you blew the money (like a lot of people do with inheritances), I would want to tell you to feel bad about it.)

  14. “The uncomfortable truth is that everything is unreliable”
    True of course, but as a country we are moving towards increasing individual risks so I find it important to maintain some risks at a non-individual level. For me, that means basic education, basic retirement, and basic health care.
    That doesn’t mean guaranteed $300,000/year pensions for anyone, though individuals are welcome to save to try to maintain that level for themselves.

  15. “(If you blew the money (like a lot of people do with inheritances), I would want to tell you to feel bad about it.)”
    Nah, it all went into the mortgage, retirement accounts and college funds for the kids. We also took a few trips knowing that since she loved to travel, she would want us to do that with the money.

  16. “True of course, but as a country we are moving towards increasing individual risks so I find it important to maintain some risks at a non-individual level. For me, that means basic education, basic retirement, and basic health care.”
    Currently, the federal government borrows something like 40 cents of every dollar that it is spending. That won’t go on forever. We’re not making things safer by pushing more and more stuff to the federal level (healthcare, education, etc.)–we’re just ensuring that when things go bad, they will go bad on a truly epic scale.
    (A digital cookie goes to the first person who says “But we don’t have to default! We can just print more money!”)

  17. Part of the problem with addressing public worker pensions is contractual rights. In Oregon public employee pensions are a unilateral contract and it is almost impossible to get the state Supreme Court to endorse any reduction of benefits because the employee is assumed to have a contract right in those benefits once he or she has worked the hours required to earn them.
    Any attempts to fiddle with interest rates, COLA adjustments, actuarial assumptions, or taxability of benefits run into either state law contract claims or federal non-discrimination laws.
    And the real problem for most public employee pension systems is the market. Those benefits were negotiated when the market was up and apparently the public employer-negotiators failed to remember history (the Great Depression) and are doomed to repeat it. If the market were up and had continued strong earnings, nobody would care what pension benefits were paid–because no budgets would be busted or taxes raised to pay them. They’d be paid out of market earnings.

  18. I expect that the contractual rights/state constitutional requirements will last for a while, and then be blown over by populist outrage. This will not be a pretty process. I was impressed by Scott Walker’s success in getting private-sector unionized workers to vote in large numbers against preserving the favorable arrangements for public-sector unionized workers.

  19. Which I most certainly was not impressed by, especially since they did not include fire/police. That bit of triangulation was classic loose/loose.
    Constitutional requirements are pretty hard to blow over with populist outrage. You’re right that it could happen, eventually, but the collateral cost I’m seeing is a disruption of any lip service to common community. Maybe inevitable, in the day of globalization, but the results are going to be seriously unpleasant for everyone who isn’t a one-percenter.

  20. “Constitutional rights” are entirely the product of judges, who in many, perhaps most, states are elected. Even where they are not, that just means that they reflect elite, not popular, opinion. If Laura and the other upper-middle class Ph.D.s think that public pensions need trimming, then the judges will find that such trimming is permitted by the Constitution.
    Just as there is no true economic security, there is no true legal security.

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