New Study Fails Basic Math in Teacher 401k, Pension Debate

401k, teachers, pensions, defined benefit
This hurts.

People like pensions—who knew?

News hit over the holidays that teachers are quitting the profession at the highest rate on record. It sparked alarm that “small raises, budget frustration and opportunities elsewhere” could have a lasting impact on the quality of the nation’s education system.

It also brought renewed focus on retention strategies, and the role pensions play in career longevity.

And now a new report finds that teacher pension plans play a critical role in retaining educators, while also providing greater retirement security than 401k-style retirement accounts.

Eight out of 10 educators serving in the six states studied can expect to collect pension benefits that are greater in value than what they could receive under an idealized 401k-type plan. This is according to “Teacher Pensions vs. 401ks in Six States: Colorado, Connecticut, Georgia, Kentucky, Missouri and Texas,” from the UC Berkeley Center for Labor Research and Education and the National Institute on Retirement Security.

It also finds the typical teacher in states that offer pensions will serve 25 years in the same state, while two out of three educators will teach for at least 20 years.

Which of course is great, except that it conveniently forgets to mention strapped state budgets, longer life spans and any of the other issues associated with public pensions discussed ad nauseum.

The issue was never whether employees would like a pension—who would say no to guaranteed retirement security—it’s whether it’s fiscally feasible (a comparison and case study of Illinois is notably absent from the authors’ analysis).

Colorado, whom they praise, has pensions and benefits once referred to as the “Cadillac of retirement plans,” in which unions specifically negotiated smaller teacher salaries in order to boost future benefits. Tradeoffs were made, budgets were met.

“Thanks to this study, we can put to rest false claims about the adequacy and fairness of teacher pensions,” Diane Oakley, NIRS executive director, said in a statement.

If only.

The authors purport:

  • For eight out of ten teachers in the six states analyzed, pensions provide higher, more secure retirement income compared to a 401k-style plan.
  • Conversely, only two out of 10 teachers in the six states will accrue less benefit under the lowest-tier pension offered by their state, compared to an idealized 401k-style plan.
  • In all six states, most teachers would require substantially higher contributions to realize the same retirement income in a 401k as the lowest-tier pension.

Are the retirement outcomes between the two exactly the same?

No, but income replacement analysis performed by other outfits finds them comparable, with even 401k skeptic Alicia Munnell, director of the Center for Retirement Research at Boston College, conceding that, “people are not accumulating less as the result of the shift from defined benefit to defined contribution plans. What has changed is not the amount of saving going on, but rather who is bearing the risk.”

Which we knew all along. It doesn’t make 401ks any less relevant, or effective, in helping teachers (or anyone else) reach an affordable quality of life in retirement.

John Sullivan
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.

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