The Center of the American Experiment (CAE) does not have the retirement security of Minnesota’s public teachers in mind when it argues in this paper for state legislation to convert defined-benefit pensions for teachers and other public workers to 401(k)-type plans.
The organization advocates shifting all current and new teachers into a defined-contribution plan similar to “what college professors enjoy at our state universities.” The average salary of a K-12 teacher in Minnesota is about $50,000, compared to an average salary of nearly $90,000 for full-time college professors. Obviously, professors are better able to take advantage of defined-contribution retirement plans. However, when given a choice, many choose a defined-benefit pension.
Many Minnesota K-12 teachers exercise their option of saving in a 403(b) defined-contribution plan, which is similar to a private-sector 401(k). The 403(b) plans are intended as a supplement to Teachers Retirement Association pensions and Social Security, because as we have learned from the failed 401(k) experiment, private-sector workers do not get sufficient retirement income from 401(k) plans and are struggling to sustain themselves in retirement on Social Security alone.
A recent study by the National Institute on Retirement Security found that the average retirement savings balance in the U.S. is a paltry $3,000 (the study included those whose balance is zero) and even those within a few years of retirement have only $12,000 in their accounts. Is this what the Center of the American Experiment wants for Minnesota teachers? As for taxpayers, who would pay for the increase in public assistance and nursing home costs for those who either have no retirement savings or whose savings run out? Who would pay the $3 billion it would cost Minnesota to transition from a defined-benefit pension program to a 401(k) system?
Even Josh McGee of the Laura and John Arnold Foundation believes the 401(k) model is flawed. “The 401(k) has been implemented poorly in the private sector,” he told the Legislative Commission on Pensions and Retirement (LCPR) last month. “People just don’t save enough for retirement. There are high fees. … There’s poor asset allocation and poor options for annuitization.”
There is no factual basis for the CAE’s allegation that Minnesota’s public pension systems are not properly valuing liabilities. In fact, we rely on professional actuaries, and our valuations are regularly audited by an outside actuary employed by the LCPR. In addition, we have been fortunate to have high investment returns averaging over 10 percent annually over the last 33 years, ranking us in the top quartile nationally among public funds.
Minnesota’s public employee retirement system boards of directors continually monitor the funds’ health and regularly report to the LCPR. The statewide pension systems proactively go to the commission with recommendations for reforms to make the plans financially stable and sustainable. The 2010 and 2013 reforms the CAE denigrates as “tweaks” are saving $6.44 billion in pension costs. The major bond ratings agencies have repeatedly cited Minnesota’s well-managed pension plans as a positive for the state’s credit rating.
TRA’s average pension is modest — $2,300 a month – and employees contribute half the cost. Many other states have low – or no – employee contributions. In addition, Minnesota has a very high “normal retirement age” of 66 – that is the age at which a public employee can retire with an unreduced pension. There is a significant reduction for every year a public employee retires before age 66. Minnesota is held up as a model for other states for its modest benefits and disciplined funding.
Retirement security is the real issue at hand here, whether we’re talking about a Duluth teacher or any other public- or private-sector worker. Moving public employees into the same retirement program that is failing our private-sector friends, family members and neighbors is no solution to the retirement savings crisis.
Laurie Fiori Hacking
Teachers Retirement Association
TRA submitted this commentary to the Pioneer Press in response to the opinion piece by Kim Crockett of the Center of the American Experiment.