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Maybe Pensions Aren't the Problem; Maybe We Are

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Happy new year, people! Raise your hand if you're as excited as I am to find out what this new year will bring. We've already seen our new Congress try to "drain the swamp" in Washington by removing all the water (ethics watch dogs, reporters, etc.), leaving only the gators behind, only to have to backtrack when the Main Swamp Drainer, Old Man Trump, couldn't even bring himself to get on board. It's going to be an exciting year!

This seems like as good a time as any to go back to the issue I ended last year on: pension funding for retired teachers. I know, I know—there are more than a few teachers out there we'd love to put out to pasture, sooner rather than later. That's what makes this such a sexy topic: without any decent incentive to retire, some old teachers are like old ballplayers. First, they move from behind the plate to the outfield because their offesnive skills are good but their defensive skills are lacking. Then they move from the outfield to first base because their deteriorating defensive prowess has become too much of a liability to the team. Then they move from first base to the bench, where they can function reasonably well, the American League at least, as designated hitters—because when your main competition for a spot in the batting order is a pitcher, the bar is set pretty low. Sometimes it's easier to trade on past glory than on current productivity.

But I digress. My point is that a good retirement incentive is good for everybody. It's good for older teachers who may find their best days in the rearview mirror to get on while the getting's good, and it's good for younger teachers trying to secure a place in the profession. I mean, would you rather watch an aging Jose Canseco flail at fastballs or watch the next Mike Trout get his chance? I know which one I'd prefer.

It may be this kind of thinking, in fact, that encouraged legislators here in Pennsylvania in the early 2000s, when times were good, to increase benefits for public retirees, including teachers. It actually might have made some economic sense, too: if times were good—and let's remember here that they were pretty good, and no one, I mean no one, not anyone, could have foreseen that any kind of bubble might burst at the time—then increasing benefits might have seemed like a great idea. After all, there were new technologies being employed in every sector that seemed to herald an era of stable growth and prosperity. In that kind of environment, it might have made sense to encourage more teachers to retire to make way for new teachers eager to take their place, and to give those outgoing employees a retirement benefit that would serve their needs in case the growth continued. It can be easy to forget that defined benefits can cut both ways.

Alas, it was not meant to be. We all know the story: the market crashed, people had their savings wiped out as real estate values tanked, and a new era of cynicism, anger, bitterness, and uncertainty set in. It didn't help that Congress offered up $700 billion to prop up the banking system (although it should be noted that the next Congress also offered a huge stimulus that helped many everyday people, even if it was pilloried as a waste of money by free market ideologues terrified that government spending would only make things worse). The federal government may have favored stimulus, in fact, but in the states the reaction was the opposite: everything was reined in. Some public schools still have not recovered. And then that same Congress faced an electoral bloodbath in 2010 from which it could be argued the country, and economic policy, have still not recovered.

But I'm digressing again. Here's my second point: it's easy to dismiss the decision by state lawmakers here in Pennsylvania to increase benefits for retirees as just another example of bad decision-making spurred by pressure being put on legislators by special interest groups like the much-reviled teachers unions. But there may be other explanations. In fact, our willingness to lean on this one explanation suggests that something is, in fact, very broken in our democracy. We've become so cynical that the only way we can process a decision that has far-reaching negative consequences is to attribute it to bad behavior. There's good reason for that, I guess—you know what I mean if the words "Iraq," "Watergate," and "Lewinsky" mean anything to you—but at some point we have to be more circumspect on our analysis of how the political system works if we actually want it to work.

This is at the heart of the discussion I've been having with Chad Aldeman of Bellwether Education Partners about pensions and about the best way to compensate teachers at the end of a long career. He and I agree on a few things. First, and most obviously, the crisis we are facing is a huge one, and there is no easy way out. Pennsylvania is not the only state dealing with this problem, but the mountain it has to climb is as steep as any. I also agree with Chad when he says that most teachers do not receive full benefits from their retirement plans because they leave the profession early—that much is obvious—and I agree that making benefits more "portable" (meaning they would follow teachers wherever they decide to go, whether they stay in teaching or abandon it for something else) makes a lot of sense.

But this is also where we part ways. Chad seems to believe that the solution to the problem is to convert all of our public pension plans into private retirement accounts, which is a perfectly conventional thing to think these days. The idea here is one we're all familiar with: instead of offering a defined-benefit plan (which is exactly what it sounds like: your benefit is clearly defined, and you get it as long as you meet the guidelines), Aldeman would have teachers converted to a defined contribution plan—one in which both teachers and their employers are compelled to contribute a certain amount (usually a percentage) of the teacher's pay into a tax-sheltered retirement account on a monthly basis until retirement. But here's the catch: in a defined contribution plan (think 401k or 403b), the contributions may be defined but the benefits are not. Contributions are invested, and the payout depends on how well those investments do. Yes, it's true that these are mostly considered "safe" investments, investments in things like mutual funds or bonds. But they are investments nonetheless, and there is risk involved.

What kind of risk, you might ask? Well, ask anyone who served in Pennsylvania's General Assembly back in the early 2000s. You might be surprised to know that many state pension funds are also invested: the state takes the contributions of future beneficiaries and its own contributions and invests them as well. The money doesn't just sit around collecting dust. So if the market fails to perform someone has to make up the shortfall. The difference, of course, is that states are required by law to protect the investments employees have made. They've made a promise by defining the benefits employees will receive when they retire. The crime Pennsylvania committed was not increasing benefits; it was failing to feed the kitty when its investments were eviscerated by the market crash.

Of course in today's uncertain economic climate that promise is really hard to keep. It's even harder to keep because public opinion has increasingly coalesced around the idea that defined benefit plans cannot work. Aldeman, for his part, seems to have bought it too. Sometimes I wonder if I shouldn't. It all sounds so compelling. If only we could find some examples of places where pension plans are actually working...

Oh, wait; here's some evidence. If you follow the link you can see that some states and localities actually have very healthy pension funds. Infact, the author attributes much of the bad press given to failing or overly generous pension plans in some states to "pension envy." Some of it may link back to the great and suggestive name of Missouri's plan ("LAGERS"), a name anyone could envy, but much of it probably stems from the fact that 401k-type plans are simply not working for most American workers. In other words: people look at the puny savings they have collected for retirement in their IRAs and read about how public employees are doing better than they are—and then, rather than ask "why is my retirement plan so bad?" they ask "why is theirs so good?"

In a rational world we would look at examples of things that actually work and try to build from there, instead of looking at the ones that don't and using them as a starting point. But of course it makes sense to begin from failure if you've already decided what you want the solution to be. It also makes sense to do that if you have convinced yourself that all of our existing institutions and ways of doing things are inherently flawed and irreparably broken. I'm willing to match my contrarianism up against anyone's on most days, but I'm not so much of a cynic that I can believe that everything we've ever created was created in bad faith. I'm also not so cynical that I can believe that nothing we have is worth saving. Maybe it's the history major in me, or maybe it's blind, stupid, naive faith in the idea that people will do what's good for others when they see that it's good for them too. I benefit when everyone has a social safety net because providing one for them is more efficient and less expensive than trying to piece together a fix in the middle of a crisis. An ounce of prevention is worth a pound of cure.

So I'm doubling down on my original position, which is that the problem here is not the plan itself but the way it was managed. Worse than that, our growing cynicism toward public things, public employees, and government itself, is feeding a frenzy to dismantle a system that, with a little responsibility and an equal amount of commitment, could function very well indeed. I'm out of space here so more details will have to come next time. I promise not to wait until next year to deliver them.

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