The National Council on Teacher Retirement
Supporting Retirement Security for America's Teachers
New Study Shows California Teachers Better off with a Pension than a 401(k)
A new report from the University of California, Berkeley, finds that for the vast majority of teachers, the California State Teachers’ Retirement System (CalSTRS) defined benefit pension provides a higher, more secure retirement income compared to a 401(k)-style plan.
The new study, conducted for CalSTRS by Nari Rhee, Manager of the Retirement Security Program at UC Berkeley’s Center for Labor Research and Education, and William Fornia of Pension Trustee Advisors, was released on February 4, 2016. It shows that switching to an account-based retirement system—such as a 401(k) or cash balance plan—would “sharply reduce the retirement income security of teachers who account for a majority of the educational workforce in California,” according to a press statement accompanying the report’s release.
Based on the report’s research, forty percent of new hires leave before meeting the CalSTRS five-year vesting requirement and do not return to the education system covered by CalSTRS. Indeed, many leave the profession altogether. Significantly, however, the report finds that these so-called “early leavers” account for just 6 percent of teaching positions. As the report’s authors explain, although early career turnover is high, “most of the teachers that a student will have during their K–12 education journey in California will have served 20 to 30 years or more before they leave public education in the state.”
CalSTRS Chief Executive Officer Jack Ehnes points out that this “clearly rebuts the myth put forward in several studies that seek to show that teachers will not benefit, or even vest, in a defined benefit retirement plan.”
Ehnes was referring to recent studies by the Urban Institute, the Manhattan Institute, and Bellwether Education Partners—all of whom have received significant funding from the Laura and John Arnold Foundation—that have questioned the adequacy and fairness of defined benefit pensions, including those provided by CalSTRS, because a large percentage of newly-hired teachers drop out early, and therefore do not collect full pension benefits. These studies conclude that defined contribution plans such as a 401(k), or a cash balance plan, would be fairer. They argue that new-hire attrition rates, or teacher turnover, should drive retirement plan design.
However, as the UC Berkeley report shows, analyses based primarily on these attrition rates ignore the fact that “most classroom teaching positions are not occupied by those who leave after a few years, but by those who stay long term.” Therefore, a CalSTRS fact sheet accompanying the new report’s release stresses that “restructuring retirement benefits to advantage temporary teachers, at the expense of a large majority of educators, makes little sense.” In short, it is “misleading to use young, new-hire turnover to represent the majority of the educational workforce as a whole,” CalSTRS points out.
The new report’s key findings are:
• Most classroom teaching in California is performed by long-career teachers who are well-positioned to benefit from a traditional pension.
• For the vast majority of California teachers (six out of seven), the CalSTRS defined benefit pension provides greater, more secure retirement income compared to a 401(k)-style plan.
• Conversely, only one out of seven teachers currently teaching in California schools will accrue less benefit under the CalSTRS defined benefit plan than they would if contributions were deposited into a defined contribution, 401(k)-type plan—assuming average investment returns.
• Focusing on new-hire attrition rates is misleading.
• 401(k) and cash balance plans generate their own risks and inequalities in retirement income, decreasing the incentive for early and mid-career teachers to stay, and making it harder for older teachers to retire.
Meredith Williams, NCTR’s Executive Director, praised the new report as an important new addition to NCTR members’ “tool kits” for defending the defined benefit model as the centerpiece of real retirement security. “Once again, the simplistic, misleading logic of the Arnold Foundation’s surrogates has been revealed,” he said. “As the report underscores, the vast majority of teaching in California is performed by educators who have remained, or will remain beyond those first five years when so many new teachers are discovering that teaching is simply not for them,” Williams continued. “However, once they become vested, the new report shows that few teachers leave before retirement age,” he noted.
“I think that this is very likely to be the case across the nation,” he went on, “making the essential message of this report so important in rebutting the claims of those who would argue that a defined contribution plan, or a cash balance arrangement, is better than the DB model for the teaching profession.”
“The report’s message couldn’t be clearer, and supports what a number of other recent studies such as the Colorado Auditor’s report have shown, namely that the DB model is unsurpassed in terms of meeting both employer goals for workforce retention and employee goals for retirement income security,” Williams concluded.
NCTR and the National Institute on Retirement Security (NIRS) will be co-sponsoring a webinar on this important new research on March 9, 2016, at 3:00 PM ET. Leigh Snell, NCTR’s Director of Federal Relations, will moderate, and panelists will include Nari Rhee with UC Berkeley; Ed Derman, CalSTRS’ Deputy Chief Executive Officer for Plan Design and Communication; and Diane Oakley, NIRS’ Executive Director. Mark your calendar now!
• UC Berkeley Center for Labor Research and Education: “Are California Teachers Better off with a Pension or a 401(k)?”
• UC Berkeley Press Release
• CalSTRS Fact Sheet
Obama Agrees to Changes in Healthcare Reform’s “Cadillac” Excise Tax
The Public Sector Healthcare Roundtable reports that President Obama is willing to revise the so-called “Cadillac tax” on high-value health insurance plans by increasing the dollar values at which the excise tax goes into effect in areas where health care is more costly.
The 2010 Patient Protection and Affordable Care Act (ACA) created an excise tax of 40 percent on that portion of the aggregate cost of employer-sponsored healthcare that exceeds a statutory dollar limit, revised annually. The annual limits in the law are $10,200 for self-only coverage and $27,500 for self and spouse or family coverage, but these will be adjusted for 2018 and thereafter for health costs, age and gender, and cost-of-living adjustments. Also, these thresholds are higher for high-risk professions such as law enforcement ($11,850 for individual coverage and $30,950 for family coverage, before being adjusted).
The tax is expected to produce $93 billion in new revenues over the first 10 years, not from the tax itself, but rather from income taxes on wages, which are expected to be increased as a way for employers to offset decreases in health benefits.
The tax was to go into effect in 2018. However, there is increasing pressure to do away with the excise tax from both business as well as labor groups—including the Healthcare Roundtable—who have joined together in a lobbying effort called the “Alliance to Fight the Forty,” which is supporting bills to repeal the tax. Indeed, in December of last year, the Senate voted 90-10 to do just that. Ultimately, Congress passed, and Obama signed, legislation that postponed implementation of the tax for two years.
President Obama has continued to oppose repeal of the excise tax, which he supports because of the revenue that it would create and because of the downward pressure the tax is expected to apply on health care spending. Indeed, as the Healthcare Roundtable reports, surveys are showing that “many employers have already started cutting back on their most generous health plans in order to avoid the tax.”
Now, however, the President is signaling some willingness to revise the tax. The Healthcare Roundtable—a national coalition of public sector healthcare purchasers to which several NCTR systems belong—reports that White House Council of Economic Advisers Chairman Jason Furman said in a February 3rd article in the New England Journal of Medicine that Obama, in his budget proposal for fiscal year 2017, is “supporting mitigating the tax’s impact by increasing the dollar values at which it goes into effect in areas where health care is more costly.” Specifically, the threshold would become the cost of a “gold” plan in the local health insurance exchange, if the cost of such a plan were to exceed the statutory threshold.
But the President continues to oppose the outright repeal of the “Cadillac tax” because of the “extensive health care and economic benefits” that the Administration expects to result from the tax, including a reduction in national health spending, more efficient care, more innovative payment models, and lower costs for employers because of the tax’s role in increasing employers incentives to negotiate for better prices and steer enrollees toward lower-priced providers, according to the Healthcare Roundtable.
Will these reforms of the tax be enough to satisfy those who seek repeal? Will the new Administration that takes over in Washington in 2017 feel the same way about the tax? For now, at least, the impact of the “Cadillac tax” has been delayed. Stay tuned!
• Healthcare Roundtable: “Obama Supports Adjusting Thresholds for ‘Cadillac Tax’”
• The New England Journal of Medicine: “The Cadillac Tax—A Crucial Tool for Delivery-System Reform”
Heads-Up: Arnold Foundation Seeking Plan Actuarial Information
The Laura and John Arnold Foundation has filed a “Freedom of Information” request with the Teachers’ Retirement System of Louisiana (TRSL), seeking actuarial information. The request was filed on January 15, 2016, by Michelle Welch, the Arnold Foundation’s Public Accountability Research and Policy Manager.
The request is for TRSL’s early retirement actuarial reduction factors for FY 2015. Welch specifically refers to “the table with the percent of the accrued pension to be allowed given the number of years of early retirement” that is discussed in the TRSL Benefits Handbook. The request seeks an “[e]xplanation of procedure of how these factors are actuarially determined,” and states that the information is being sought “to learn and understand about retirement benefits” for members of TRSL, and that it will “contribute significantly to the public’s understanding of the topic.”
Currently, there are several bills before the Louisiana legislature’s 2016 regular session dealing with public pensions. These include:
• The creation of a new hybrid retirement plan, consisting of a combination of a small defined benefit pension and a defined contribution account for new members;
• A proposed constitutional amendment that would eliminate certain protections for benefits of state retirement system members if such benefits are paid by a third-party provider and not by a state retirement system;
• A proposed constitutional amendment that would require new hires enrolled in state retirement systems to equally share the cost of certain elements of their retirement benefit with their employer;
• A requirement that administrative expenses of state retirement systems be calculated on a prospective basis and added into the employer contributions of each system instead of assessed as a net loss each year and amortized as a debt over 30 years;
• The addition of citizens unaffiliated with the retirement system to the boards of trustees of each of the four state retirement systems;
• The establishment of a tiered accrual rate for new members of state retirement systems;
• A requirement that each state retirement system actuary be approved by the Louisiana Legislative Auditor;
• The creation of additional members on the Public Retirement Systems’ Actuarial Committee;
• The setting of a minimum employer contribution rate of 20 percent for state retirement systems meeting certain funded ratio criteria, providing such additional contributions are to be used; and
• The mandate that one hour of required continuing education for members of boards of trustees for state and statewide retirement systems be conducted by the legislative auditor.
According to Louisiana plan officials, the Reason Foundation is very actively involved in these legislative efforts. The Reason Foundation has received $2,013,000 from the Arnold Foundation to “expand access to information about public sector retirement systems,” and used some of this money to produce a “Pension Reform Handbook: A Starter Guide for Reformers” that was released in July of 2014. According to its authors, the Handbook “represents a ‘what you need to know’ starter guide for anyone planning to reform their jurisdiction’s pension system,” and offers “guidance to policymakers seeking to research their jurisdiction’s pension problem, lays out the general principles of reform, and then examines in detail what it takes to build a successful reform effort from the ground up.”
It is a frighteningly comprehensive guide, providing chapters on “Researching Your Pension Problem,” including such things as “Essential Documents to Consult” and “Analytical Questions Checklists,” to “Create the Reform Coalition,” “Engaging Elected Officials and Labor Unions,” and ”Taking the Case Public.”
At 132 pages in length, with numerous charts and graphs, and 82 footnotes, the Reason Foundation’s Handbook is a well-crafted, well-argued work with little of the hyperbole and inflammatory rhetoric of many advocacy pieces prepared by opponents of public pension plans. It sounds very reasonable in tone, and claims that its goal “is to end the practice of passing unfunded liabilities on to future generations through introducing fiscally sustainable retirement plans that are fair to both government employees and the taxpayers who fund them.”
However, buried in the middle of the text is its real goal: “Reform should follow the clear and undeniable trend in the private sector and convert employees from DB plans to self-directed, 401(k)-style DC plans as much as possible.” It would appear that the Reason Foundation’s efforts in Louisiana are clearly following this plan.
NCTR encourages any member system that has also received Arnold Foundation requests for information to please share these with NCTR so that other NCTR members can be made aware of such efforts. “We have their playbook,” said Meredith Williams, NCTR's Executive Director. “Advance knowledge of what information is being sought can perhaps help us all to better prepare ourselves for potential legislative efforts in other areas of the country,” said Williams.
“Thanks for the heads-up, Louisiana Teachers” Williams concluded.
• Reason Foundation’s “Pension Reform Handbook: A Starter Guide for Reformers”
Arnold Foundation “Doubles Down” with Pew
As a recent “NCTR FYI” story reported, the working relationship between the Laura and John Arnold Foundation and the Pew Charitable Trusts’ public sector retirement systems project is alive and well.
But what was not known at the time of that story’s preparation in January of 2016 was that the Arnold Foundation has given Pew another $4.85 million for 2015–2019 to “support the Public Sector Retirement Systems project.” This is in addition to the $4.85 million that Pew previously accepted from the Arnold Foundation for the period 2012–2015.
“Needless-to-say, I am very disappointed with Pew’s continued willingness to be used as part of what has clearly become an anti-public pension crusade by the Arnolds,” said Meredith Williams, NCTR’s Executive Director. “Not only has Pew refused NCTR’s request to return the original multi-million dollar grant and end their working relationship with the Arnold Foundation, they have now doubled their money,” he continued.
“The Arnold Foundation clearly knows a good investment when they see it, and their continued largess toward Pew underscores the value of having such a well-known surrogate as part of the Arnold Foundation’s campaign of misinformation directed at one of the best vehicles there is for the continued retirement security of America’s teachers and other public employees,” Williams said. “I had hoped that the many well-designed, thoughtful, and thorough refutations of the Arnold Foundation’s anti-DB messages over the last several years would have taught Pew a lesson about their unfortunate decision to link arms with the Arnolds,” Williams noted.
“Sadly, that has not proven to be the case, and that is a very real and literal shame for Pew,” he concluded.
Director of Federal Relations
National Council on Teacher Retirement
Email: email@example.com; Phone: (540) 333-1015