Is There a Third Way in the Debate over Teacher Pensions?

Over at Education Next (one of my favorite stops these days), professors Robert Costrell and Michael Podgursky say there may be a way to make a positive move beyond the traditional debate over teacher pensions:

The critics of DB [defined benefit plans] are correct that current plans are seriously underfunded in part because benefits are not tied to contributions. This makes plans vulnerable to gaming and juicing up of benefits formulae when stock market returns are good, which, of course, leaves the taxpayers and employers holding the bag when stock market returns turn south.

DB advocates are correct in that a movement from DB to DC [defined contribution plans] can shift investment risks from employers to teachers. Last year’s stock market meltdown, which left many private sector professionals near retirement with inadequate savings, illustrates the problems associated with shifting these risks to employees. Moreover, DB advocates argue, many educators lack the expertise or interest to make efficient retirement portfolio planning decisions, and will make poor choices, while running up large fees in the process….

What those who are butting heads over DB vs. DC pensions may not realize is that there are other pension reform options besides the traditional DB and DC plans that can go some way toward addressing the concerns of both groups, and also alleviate the problems we identify with regard to mobility and retirement rules. For example, in our new article “Golden Handcuffs,” we illustrate how pension wealth would smoothly accrue under a “cash balance” (CB) plan of the type that has commonly been adopted in the private sector, and also a few places in the public sector. As with most current plans, educators and employers would make regular contributions. The pension fund would guarantee a fixed return on these contributions (which makes it a DB plan, both logically and legally). Each educator would get a notional account in the fund. This would grow each year based on the fixed return and new contributions (which makes it look similar to DC plans, except without the investment risk). When the educator chooses to retire, these returns could be converted into an annuity, just as in current DB plans, to make sure no one risks outliving their retirement savings.

(For those interested, Education Next also has put forward a podcast and a video on the topic.)

If you’re looking for more perspective on the problem, you ought to check out the works of two other smart professors who live in my area. Read these two Independence Institute reports, and you’ll be way smarter than all your friends on the issue of Colorado public employee pensions:

I haven’t come to any conclusions about the idea of cash balance plans, though. After all, I’m a long way from retirement (I need to go through school and get a job first!). But given the serious fiscal problems our state governments face and the poorly-placed incentives in teacher compensation that hurt schools and students, shouldn’t we be looking for any good solution we can?

Hey, it wouldn’t be the first time someone called me young and naive.