Institutional Investors is a business magazine that reports on issues for the investment and banking industry.
In its current issue, it identified the top 40 people fighting either to defend defined benefit pension plans or to abolish them.
It selected Randi Weingarten as the #1 figure who is fighting to protect teachers’ defined benefit pensions. That means, to teachers, that they will have a pension when they retire no matter what happens to the market. Critics want teachers and other public employees to be required to adopt defined contribution plans, where teachers choose their investments and take their chances with the vagaries of the market.
Randi opposes the defined contribution plans because it puts the burden of investment on individual teachers, who may make bad choices and see their pensions evaporate, or may be the victims of an unstable market. In the article, she notes that West Virginia tried the defined contribution plan in 1990 but reverted to a defined benefit plan in 2008.
She has also taken the lead in criticizing hedge fund managers who collect fees managing defined benefit plans while supporting right-wing groups that want to dismantle those plans. The AFT has made clear that it will divest from funds that work both sides of the street.
You go, Randi!
Diane Ravitch's blog 
This is the one “old fashioned” benefit that educators should hold onto for dear life! Those who think consumers are adept at making investment decisions are the same folks who think everyone should have a “choice” about buying health insurance and a “choice” about where to attend school (unless the choice involves children raised in poverty crossing the school district borders to an affluent community). As a Superintendent I first noticed this assault on defined benefit pensions by “budget hawks” shortly after the collapse of banks in 2008. This ngram reinforces my memory: https://books.google.com/ngrams/graph?content=defined+benefit+pensions&year_start=1800&year_end=2012&corpus=15&smoothing=3&share=&direct_url=t1%3B%2Cdefined%20benefit%20pensions%3B%2Cc0
Here’s what’s maddening: the people who squawk the loudest about this issue are people who work in the investment business: the very individuals who stand to benefit most from a switch away from government operated pensions. Here’s a post I wrote on this issue when I started my blog:http://waynegersen.com/2011/12/15/broken-covenants/
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Defined benefit plans are fine as long as they are fully funded in a timely fashion with conservative assumptions as to the expected yield and to the actual level of payouts. School boards and those responsible for managing such funds need to be clear as to the full financial implications when they make any changes to the terms of the pensions. Plans have to be immediately established to fully fund those pensions that are now under-funded.
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Chris Christie is working overtime to destroy the teachers’ pension fund in NJ. He already eliminated the COLA for current and future retirees. His attitude seems to be that how dare those teachers have defined benefit pensions while the private sector does not have them anymore. Both political parties have been guilty of not properly funding the pension fund but Christie has been especially nasty and especially voluble about the teachers’ supposedly golden plated pensions. He has been very successful at waging class war between middle class private and public sector workers while the Wall Street banksters laugh all the way to the Cayman Islands. Over the past decades the teachers have paid billions into the pension fund, it’s not some kind of gift, it’s deferred compensation.
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So it’s a race to the bottom. I’m always fascinated by the “get in line with the private sector” argument.
Back in 1999, when the economy was humming, our local took a 1% pay raise across the steps and left our benefits unchanged. My friends in the private sector laughed their asses off at our insipid agreement. They were receiving hefty bonuses and raises, sometime to the tune of 8-15%. I don’t recall anyone saying “get in line with the private sector” in 1999.
But now that their plans have fallen, income inequality is grater than ever and being employed in one’s field is less likely than it has been for 20 years, suddenly we should suffer. Just like them. So I guess we only “get in line” when it’s rough.
Plus, employees should be arguing to get the better deal. Not weakly taking a pummeling while insisting that others take a pummeling. (I’m not saying that “I want mine” but rather I can’t understand why people want everyone else to suffer instead of standing up for themselves.)
Meanwhile, the private and public middle class workers tear each other apart while the rich get richer.
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“I don’t recall anyone saying “get in line with the private sector” in 1999.”
Neither do I.
Seems we are only supposed to act like the private sector during lean times.
Or during any and all manufactured crises.
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In a profession where many leave before becoming vested, a defined contribution plan does offer the advantage of portability out of the teaching profession. It also forces the people making the promises to actually pay for the promises, not push them off onto future officeholders and taxpayers.
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Let’s also note that defined benefit plans are being compensated at a much lower proportion than they were 15 years ago. I’ve heard many a friend say, “my company used to…, but now they…” and then they emit a sorrowful sigh.
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Excellent points. I find it hard to believe folks here want to surrender control of their financial future to faceless others. At the same time, why should I pay for and guarantee the financial security of others when not everyone can receive the same guarantee. Smacks of Animal Farm.
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It doesn’t just offer portability out of the teaching profession, it also offers portability to teaching jobs in other states or districts. In my home district, New York City, teachers’ pensions aren’t even transferable to other districts in New York State.
I’m sure many here will disagree, but I think we do the profession a disservice when we make a purity test of sorts out of the pension issue. I’m sure we’re all familiar with plenty of people who have had successful experiences in more than one line of work. Providing every teacher with the option of choosing a defined contribution retirement plan will strengthen our teaching corps, not weaken it.
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I agree that there should be an option. Except increasingly there isn’t. Michigan just underwent pension reform. I’m 18 years in. I went to a friend of mine who works for Northwestern Mutual and asked about whether I should go the 401(k) route or pay the required increase in money to the pension fund (which equated to a 7% pay cut). He said the required increase was my only real option unless I intended to teach for 20 more years. He also noted that rookie teachers had no real choice the way the numbers were structured. They had to take the 401(k)
So there are options, but they’re not really a choice.
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Defined contribution plans are nothing but a phony baloney rip off. What good is portability if the defined contribution plan is not there when you need it. Oh wait, I forgot, you can never lose playing that lottery called the stock market.
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I understand that pension recipients would rather shift all the investment risk to taxpayers, but surely the pension recipients understand why the taxpayers might wish to shift the risk back to the pension recipients.
Perhaps Dr. Ravitch would like to take a position here as her retirement plan at NYU is a defined contribution plan, as is mine. Does she see it as “phony baloney”?
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As usual, you are wrong: what you call the “investment risk” being shifted to taxpayers (among whom are teachers with defined -benefit pension plans, by the way) is in fact deferred compensation that was always understood to be such, at least until the Overclass decided that it was unwilling to maintain the “sanctity” of contracts with working people.
That the Overclass is now trying to get out of that arrangement by scapegoating public workers is typical. That it uses the pseudo-science of orthodox economics as a cover for its wealth extraction is what we’ve come to expect..
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Michael:
Can you provide citations to support your notion that teacher pensions are deferred compensation? I strongly suspect that this is no more the case than calling Social Security deferred compensation. My understanding is that teachers could opt out of Social Security because it was redundant with their pensions.
Who exactly is the Overclass? Most of those on the hook for teacher pensions are local property tax payers and State income tax payers. The wealthy have the means to minimize their taxes by investing in tax free municipal and state bonds that are issued to cover such liabilities and that local tax payers are on the hook for repaying.
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The way defined benefit pensions work is that money is invested today, earns some rate of return, and paid out in the future. In the public sector it is typically assumed that the average rate of return will be 7.5%. If the invested funds run short of that (as is often the case because 7.5% is very optimistic), someone must make up the difference between what was promised and what funds are available. If it is not taxpayers, who is responsible for making up the difference?
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I can only assume that as college professors, you, TE, and Dr. R., participate in TIAA-CREF. Which is a whole different ball game than the crummy and yes, “phony baloney” defined benefit plans those of us in other sectors are forced to participate in. I would love to take my family’s retirement savings out of the crummy funds my husband’s company forces us to choose among and put them all in a TIAA-CREF account!
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Barbara,
It may be that there are better or worse defined contribution plans, just as there are better and worse defined benefit plans. The flavor of the comments here is that defined contribution plans AS A CATEGORY are deficient. I am glad you see that this is not true.
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Barbara:
TIAA-CREF funds on average are rated with 3 stars by MorningStar which puts them in the middle of the pack.
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“teachers could opt out of Social Security”
You make it sound like individual teachers had a choice.
Not the case, at least in my district.
My district opted out back in the 1970’s. Most of us wish they had not done so.
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That is not relevant to the issue. Pensions are pensions and are not deferred compensation.
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I have to leave for the day very soon but I don’t want to go before I make clear that I absolutely do not think defined contribution plans are better then defined benefit plans, for all sorts of reasons starting with the volatility of the stock market. TE, you misundertood me.
My experience with defined contribution plans has been that we are given a roster of a handful of plans, each less inspiring than the last.We do not have the options and flexibility we have with managing our own personal nest egg. “The middle of the pack” doesn’t sound bad at all in comparison — there’s no reason to think we will ever do consistenly better than that given the choices we are given.
But let’s take a step back here. I only brought up TIAA-CREF because TE’s statement about college professor’s retirement plans seemed disingenuous to me.
The REAL issue is, why would anyone think that in the world’s most wealthy nation, that retirees should live lives of need and want? So Wall Street can collect even more money? They already have plenty.
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Barbara,
Defined benefit plans are also subject to the volatility of the stock market, it is just that the local taxpayers must make up any shortfall in the investment returns.
While a defined benefit plan increases the certainty of teacher pension payments, it decreases the certainty of taxpayer after tax incomes.
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Joe:
Where do you think union pension funds are invested?
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Come back bernie when the union pension funds are forced to choose between lets say, four mediocre mutual funs and ONLY those four mediocre mutual funds. Right now they have professionals who can move the union’s pension stock investments however they deem best in response to changing conditions.
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Barbara:
That is not the point. The point was investing in the Stock Market. What makes Union money managers different from other money managers?
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When Weingarten stands against the philanthropic billionaires imposing their wills upon my classroom, then I will applaud.
Not today.
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Agree…she has to make it look like she’s doing something for us.
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From another of Diane’s posts today:
http://www.salon.com/2013/11/04/chris_christies_demented_you_people_movement_the_rights_school_for_cash_obsession/
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Arne Duncan @arneduncan 10m
Thoughtful essay by TN Gov. @BillHaslam on how his State improved the most on #NAEP http://tnne.ws/18rULef
Still no mention from Arne Duncan on those states that initiated his narrow version of reform yet didn’t post higher test scores, or those states that refused the narrow reform recipe yet improved.
It’s amusing that with all the blather about data, they’re completely oblivious to how they’re cherry-picking and spinning.
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Chiara Duggan: I agree.
In addition, after looking at the scores, I didn’t see anything that took my breath away, either rises or falls. Frankly, I am inclined to give a nod in Gerald Bracey’s direction:
Data Interpretation Principle #23. If a situation really is as alleged, ask, “So what?” [READING EDUCATIONAL RESEARCH: HOW TO AVOID GETTING STATISTICALLY SNOOKERED, 2006, p. 136]
As for massaging the data, the edubullies and their accountabully underlings adhere strictly to the following maxim: “Get your facts first, then you can distort them all you please.” [Mark Twain]
😡
Lastly, on pensions. I go with an old adage that the owner of this blog brought up some time ago: “A promise made is a debt unpaid.”
Still works for me.
😎
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Arne Duncan @arneduncan 7 Nov
Congrats to DC & TN for being the fastest improving states with #NAEP results! Lots of courageous, hard work by committed educators.
Was there no number three? 🙂
Interesting how Duncan uses data, isn’t it? Remember! He’s an “agnostic”. Just looking at what works! And leaving out any inconvenient information that contradicts his beliefs or complicates marketing efforts.
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“Institutional Investor “, a business magazine that reports on issues for the investment and banking industry, rates a union leader as number one “in protecting teacher pensions.” What’s wrong with this picture??
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From forbes.com 2-25-2011: ” The pension plan is the direct result of deferred compensation- money that employees would have been paid as cash salary but choose, instead, to have placed in the state operated pension fund where the money can be professionally invested (at a lower cost of management) for the future.”
Pulitzer Prize winning tax reporter, David Cay Johnston, has written that pensions are deferred compensation and that the workers pay 100% for their pensions.
http://www.forbes.com/sites/rickungar/2011/02/25/the-wisconsin-lie-exposed-taxpayers-actually-contribute-nothing-to-public-employee-pensions/
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Make sure to read on to the end for the update, where the author acknowledges that pension fund shortfalls are guaranteed to be made up by the taxpayers. Also note that this article is in reference to Wisconsin’s pension funds specifically–there are enormous differences in the overall health of various public sector pension funds. More than a few are in miserable shape due to a combination of underfunding, retroactive enhancements, or assuming unrealistic or even Madoffian returns.
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Kudos to Randi W indeed. She was also highlighted in Vanity Fair’s December issue. She took on hedge fund investor Dan Loeb as he was maneuvering to take over the management of AFT’s $800B pension fund – while being a ‘enthusiastic supporter and board member of StudentsFirst’.
She mentioned his opposition only intensified her commitment.
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Defined benefit plans are not subject to the whims of the stock/bond markets – defined contribution
plans are. A 401K – defined contribution plan – is no substitute for a traditional defined benefit
plan.
Thirty years ago a defined benefit plan that was 80% funded, was considered ‘fully funded’. Much
of the recent “trouble-in-river-city” is based upon actuarial assumptions that are tweeked to cause alarm,
blow the whistle and demand concessions beneficiaries.
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Defined benefit plans are subject to the up and downs of asset markets but the risk is born by local taxpayers not the pensioners.
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“risk is born by local taxpayers not the pensioners.”
Aren’t the pensioners usually ALSO local tax payers?
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But local taxpayers are not typically pensioners.
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In New York State, the entirety of state, city, or federal pension income is exempt from state taxes for anyone over 65; the first $20,000 of such income is exempt for anyone over 59.5. Several other states have similar protections.
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While you are
technically correct, the whole idea of a defined benefit plan is to remove this risk as much as
possible – for all practical purposes the exposure is minimal. There are many professional managers (excluding hedge fund managers) who are very proficient at this and charge very reasonable fees.
Unfortunately, the risk is NOT minimized for investors of defined contribution plans. (Unless the
owner happens to have the talent of a professional defined benefit manager.)
My contribution to my defined benefit plan is a percentage of my salary. If the municipality funds
the plan on a timely basis and officials make sure managers stick to their knitting, then there
is not any risk BORNE by the taxpayer.
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I doubt the citizens of Illinouis feel that the exposure is minimal (see The Economist story here: http://www.economist.com/news/united-states/21570733-illinois-lawmakers-fail-tackle-states-pension-crisis-squeezed)
I include the risk of a municipality not funding the plan on a timely basis, managers not sticking to their knitting, municipalities assuming unrealistic rates of returns as part of the risks associated with a defined benefit plan. Assuming risks away always makes something appear less risky.
It makes more sense to argue that the risk of a pension shortfall is spread wider if taxpayers are obligated to make up the difference between what was promised and the returns on investment. This gives these pensions a sort of insurance feature. There are two problems with this. First, some of the taxpayers will not have pensions supported guaranteed by future taxpayers, so they receive little benefit from providing the insurance. In essence they are being asked to pay insurance premiums when there is no chance that they will collect if something happens to them. Another complicating factor is that local taxes are often very regressive, so you may well be asking the relatively poor to guarantee the pensions of the relatively rich. This might seem unjust to some.
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Butchered that one, Illinois of course.
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The problems in Illinois have nothing to do with poor performance of the pension funds. The problem comes with the state not contributing their portion for about forty years. The state has avoided dealing with tax policy by funding government programs with money that should have been going to pensions. Look up Ralph Martire and The Center for Tax and Budget Accountability.
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Those are the very risks that the original poster in this thread assumed away.
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Incidentally, it was the state that opted us out of social security. We have no say. We do not even get the social security benefit we may have earned when not working as teachers. It is reduced significantly.
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I think this laudatory congratulation to Randi Weingarten is, well, more than a bit overblown. Weingarten really has little option but to defend the defined benefit plan. So it’s more than a little premature to give her a hearty pat on the back for acting out of necessity. If she turned her back on teacher retirement, the rank-and-file would turn their backs on her.
Having said that, many of the comments reflect a gross misunderstanding of the pension “crisis.” Pensions in many states have been grossly underfunded. For years. Decades even. It’s not that “promises” were made that get foisted on the taxpayers. It’s that politicians failed to invest the required dollars for the pension plans they approved. Or, as in the case of New Jersey for example, that politicians cut taxes and then raided state pension plans for money to balance budgets, pushing unfunded liabilities into the future. Remember Christine Todd Whitman? She assumed office, cut taxes, and hit up the state pension fund for the cash to balance the deficits she caused. The actuaries agreed that Whitman’s move drove pension liabilities far into the future.
Or consider the case of Lil Bob McDonnell in Virginia. Virginia has one of the lowest tax rates in the country. But rather than raise taxes even modestly to fund education and social services, McDonnell, a staunch conservative Republican, raided the state pension plan for nearly a billion dollars to balance the state budget, and then bragged about his fiscal “responsibility.” McDonnell’s raid comes with strings. He promised to pay the money back – at 7 percent interest – beginning AFTER he leaves office, conveniently leaving his fiscal mess to somebody to clean up.
Sound familiar?
Ronald Reagan (in)famously promised to cut taxes by $750 billion, spend an extra trillion dollars on defense, and balance the federal budget. No one with an ounce of common sense believed it…but he was elected and he implemented his plan. Deficits – both budgetary and trade – pile up. Federal debt exploded. After 12 years of Reagan-Bush1, the national debt more than quadrupled. Because of imbalances in exchange rates (the dollar appreciated relative to other currencies) and trade deficits, dollars left this country for Japan, and Korea, and China. Jobs followed the money. This was the onset of the deterioration of the American standard of living.
In essence, what these politicians have been doing – and doing relatively successfully – is playing an expensive shell game with the citizenry and with employees. Sort of the same thing they’ve been doing with Social Security…spending its surpluses and using them for tax cuts that were “promised” to “stimulate” the economy. And now, many of them are demanding that more tax cuts for the wealthy and corporations are needed, and “entitlements” like Social Security have to be cut. It’s a very perverse and dangerous ploy.
Does Randi Weingarten really have a choice here? Let’s not applaud her too much for actually doing her job.
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Anyone care to tell the story of the Rhode Island charade?
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Matt Taibbi surely did….
http://www.rollingstone.com/politics/news/looting-the-pension-funds-20130926
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No, but in this case, we can be glad that she is “doing her job.”
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