Fordham Institute report on teacher pensions flawed, not credible

Last week, the Fordham Institute released a study that erroneously claims teachers in Minnesota and in most states would be better off investing retirement contributions on their own rather than receiving a TRA defined-benefit (DB) pension after a career of teaching. The study used flawed calculations and methodologies to arrive at this conclusion by very significantly underestimating the value of a TRA pension and overestimating an individual’s ability to earn high investment returns.

The study’s calculation of future pensions used outdated life expectancy data that predict far shorter life expectancies than Minnesota teachers experience and made other erroneous assumptions about likely retirement ages. These miscalculations shortened the projected pension payout period by 10 years. The study’s numbers also inflate the potential earnings an individual is likely to earn from investing their own contributions. Below is a detailed description of the problems and miscalculations found in the study.

Pension Accumulation/Payouts: The study

underestimates the value of the MN pension benefit for several reasons:

1. The study uses Centers for Disease Control (CDC) 2007 life expectancy tables, which predict far shorter life expectancies than MN-specific teacher mortality tables predict. For example, CDC tables predict an age 60 female will live to age 84 while TRA’s mortality tables predict they will live to age 90.2. CDC tables predict an age 65 female will live to age 84.9 while TRA’s tables predict age 90.3. Due to life expectancy errors alone, the study’s calculations shorten the likely pension payout by between 5 and 6 years.

2. The study assumes a teacher retires at the plan’s statutory normal retirement age, which in TRA’s case is age 66. In reality, TRA’s average retirement age is about age 62. By assuming a beginning payout age of 66, the study shortens the payout period by another four years. These years are excluded in the pension wealth accumulation part of the equation.

3. The study’s combined use of an overly advanced retirement age of 66 and wrong mortality tables results in a predicted payout period of 18 years to 19 years whereas using TRA-specific data results in a payout of over 28 years, a very material difference of over 10 years.

4. There are no references in the study indicating that the authors incorporate COLAs in the calculation of pension payouts.

Accumulated contributions plus interest: The study greatly

overestimates the value of the teacher’s theoretical cumulative contributions plus investment earnings by assuming individuals can invest and earn as much as large institutional investors. This is very optimistic and unrealistic. Here are the study’s flawed assumptions regarding potential investment earnings.

1. The study assumes the individual is capable of earning a very aggressive compound annual return, net of investment fees, of 8.5% in each year of the teacher’s entire working career.

2. According to the National Institute on Retirement Security (NIRS), Morningstar advises individuals making retirement plans to use an expected return on their investments of 5%.

3. Previous studies show that individuals tend to earn 1% to 2% less per year than institutional investors due to high investment fees, less skill than institutional investors, and no access to certain high-performing investment sectors such as private equity and venture capital.

4. Individuals investing their own assets must reduce their risk as they approach retirement age and move more retirement assets into lower-performing bonds and other fixed income investments. This was not taken into account in the study which assumed an 8.5% return each and every year through the age 66 retirement age. The current investment market climate shows how retirees near retirement are struggling to eke out very low single digit returns on bonds and fixed income investments.

Teachers highly value retirement plans as an extremely important job feature. The DB pensions that cover the vast majority of teachers address an essential retirement security need –

replacing income when one stops teaching. The DB pension adds value by assuring that teachers cannot exhaust their retirement savings and will not be hurt by investment losses and inflation. School systems use pensions to recruit, retain and manage the teaching workforce.

Defined contribution plans help teachers manage employment risk, making portability easier for teachers who leave. However, studies have shown that workers need to save more in a defined contribution plans to offset the lower returns in self-directed retirement accounts and make sure that retirement savings last for as long as a teacher will live. Teachers live much longer than average workers and, in TRA’s case are predominantly female. Three-fourths of TRA retirees are women.

Calculations for school districts conflict with results of more extensive analyses of alternative retirement plan designs done for teacher pension plans. Colorado Public Employees Retirement Association (COPERA) is an example of a system recently studied by the state’s auditor in an extensive 217-page analysis of typical teacher tenure patterns based on several plan design alternatives. In every situation, COPERA’s pension replaced a higher level of income than all of the alternative designs. For example, even a teacher who teaches for only three years would receive 40 percent more retirement income from COPERA than from investing the $6,700 refund and buying an annuity.

Courtesy of Communications Office

Teachers Retirement Association

Public Employees Retirement Association

Minnesota State Retirement System

 

Pension commission hears public testimony on TRA, St. Paul Teachers funding proposals

Teachers Retirement Association stakeholders testified Tues., Feb. 14, at the Legislative Commission on Pensions and Retirement (LCPR) regarding TRA’s board-approved 2017 financial proposal.

Eighth grade social studies teacher John Bartholow, who teaches at St. Michael-Albertville School East, said that he would question whether to remain in the profession if drastic changes are made to the TRA pension. He cited a Towers Watson study that found that young workers consider a defined-benefit pension an important factor in accepting a job and staying on the job. Teacher effectiveness improves with experience, Bartholow said, and the teacher shortage will worsen if pension benefits are cut.

LeMoyne Corgard of Anoka-Hennepin Education Minnesota said that the TRA pension is a staple of the teaching profession and that active teachers have contributed a substantial portion of their income to their pension. The TRA proposal is balanced and will help sustain the system, Corgard said.

Isle Public Schools social studies teacher Jennifer Ernest spoke about her experience as a young archaeologist who decided to work in a small community school teaching K-12 history, science and social studies. Despite the relatively low pay for teachers, she said she hopes to retire with a sound pension someday. She added that it’s difficult for small school districts with limited resources to absorb contribution increases without state aid.

Rodney Rowe of Education Minnesota testified that half of teachers leave the profession in the first five years, so good benefits are important. EdMN supports TRA proposal because it is balanced, he said.

Lonnie Duberstein, president of the Retired Educators Association of Minnesota, said he can’t ask his retiree members to support a permanent 1 percent COLA and pointed out that the proposed employer contribution increase would still leave Minnesota well below the national average. Duberstein testified about his decisions as a young teacher to remain in the profession despite higher-paying job opportunities.

Representing active and retired Minneapolis teachers, Louise Sundin of the Committee of 13 also testified in support of the delicate balance of the TRA legislative package. Sundin pointed out that 75 percent of active teachers in Minnesota are women, and a high percentage of those are single and heads of households. “Without our public pensions we will become your wards,” Sundin said, noting that the average TRA pension check is a modest $1,800 per month. Research shows that women are 80 percent more likely to become impoverished, she said.

Sundin said that active teachers took a four-year cut as part of the last pension bill because their contributions rose 2 percent. Starting salaries in the mid-$40,000 range make it hard to recruit young talent, especially with heavy burden of student debt, she said. Sundin asked LCPR to keep the normal retirement age at 66, saying that she has a friend who teaches kindergarten and “can’t get up from those little chairs.”

Joan Beaver, board member of Education Minnesota Retired, said that EdMN Retired supports TRA’s proposal and stressed that pensions provide an important economic boost to Minnesota communities. She said that two-thirds of retirees have borne benefit cuts and that benefits are not keeping pace with inflation. TRA’s proposed lower COLA translates into a reduction of about $573 a month, she said. Even so, retirees are willing to share in the sacrifice for the good of the fund, Beaver said.

REAM vice president Paul Ehrhard similarly testified that pensions are a key element in teacher recruitment/retention and that he can’t support a COLA that’s at “1 percent for infinity.”

Representatives of school districts and school boards also testified. Gary Amoroso, executive director of the Minnesota Association of School Administrators, said his group supports TRA’s proposal and added that the TRA board engaged employer groups in the deliberation process. He stressed that state funding to offset increased employer costs is important, especially because previous TRA contribution increases were absorbed by school districts. Amoroso pointed out that the governor’s pension proposal only funds the contribution increases for two years and additional funding will be needed in the third and fourth years.

Scott Croonquist, executive director of the Association of Metropolitan School Districts, said that his group worked with TRA and supports the state aid mechanism in the TRA bill. Croonquist explained that the school aid pension adjustment mechanism is efficient and equitable because it will reimburse districts for their actual increased costs.

Grace Keliher of the Minnesota School Boards Association backed up the testimony of Amoroso and Croonquist and credited Gov. Mark Dayton for recognizing the need to help school districts cover the increased pension costs. Keliher said she supports including a mechanism in TRA’s bill that covers the entire 2 percent employer increase.

Earlier in the evening, the LCPR heard testimony regarding the St. Paul Teachers Retirement Fund Association (SPTRFA) legislative proposal. Mike McCollor, vice president of the SPTRFA Board of Trustees, Mary Gilbert Dougherty of St. Paul Schools, and Brian Rice of the St. Paul Teachers Pension Political Action Committee testified in support of the St. Paul funding bill. Rice stated that it is wise and prudent to lower the investment return assumption to 7.5 percent based on action taken by other states, and that this will keep the system’s financing solid for the long term.

The pension commission approved non-controversial changes to pension system actuarial assumptions – some of which were requested last year. The 2016 administrative bill (SF545/HF565) will be the vehicle for other pension funding reform measures that may be approved by the commission later in the session, LCPR chair Julie Rosen said.

In closing, Rosen said that the process of evaluating the systems’ proposals is only beginning and that while it’s important for LCPR to hear concerns, stakeholders shouldn’t assume that the commission has a course of action already in mind.

Courtesy of Minnesota TRA Communications

LCPR hears testimony on investment assumption, Blue Ribbon Panel recommendations

The Legislative Commission on Pensions and Retirement (LCPR) held its first meeting Tues., Jan. 31, and elected Sen. Julie Rosen, R-Vernon Center, as chair and Rep. Tim O’Driscoll, R-Sartell, vice-chair. Sen. Sandy Pappas, D-St. Paul was elected secretary. Rosen said that it’s an honor to serve on the pension commission, which has a history of crafting pension legislation in a bipartisan manner.

The commission then heard testimony from Mansco Perry, executive director of the Minnesota State Board of Investment (SBI), Myron Frans, commissioner of Minnesota Management and Budget (MMB), LCPR staff, and representatives from the pension commission actuaries at Deloitte.

Perry reviewed SBI structure, investment strategies, asset allocation, and annual return history. He reported on investment consultants’ expectation of a 7.3 percent return for the next 10 years. Perry said that the expected return is just one element in developing an assumed rate of return on pension investments, and he observed that there has been a very significant drop in the assumed rate of return over a fairly short period of time. He said that it is inadvisable for the number to bounce around, and that the rate expected by investment consultants might increase in the future. There is a need to come up with a thoughtful way to determine the rate, Perry said.

Frans presented the recommendations of the governor’s Blue Ribbon Panel on Pensions, saying that the governor asked a panel of financial professionals to review pension plan proposals and provide advice on whether to include these reform proposals in his budget. Frans said the panel felt the 8 percent investment assumption is too high and should be reduced to 7.5 percent immediately to more accurately reflect plans’ potential unfunded liabilities.

The panel acknowledged that public pensions are important to thousands of Minnesotans and provide sound financial base for recipients and the state, Frans said. The panel also supports the shared sacrifice approach developed by pension system boards and believes that funding at the state level should be made available to help reduce unfunded liabilities. Frans said the panel suggests pursuing reform strategies in the future to manage COLAs and contribution levels.

Deloitte representatives said that lowering the return assumption lowers the risk of being unable to meet obligations, and said that a more conservative rate (7.5 percent) is preferable. Deloitte provided a letter to LCPR stating that 7.5 percent is reasonable and that they don’t recommend different rates across the pension systems.

The Deloitte actuaries also noted that Minnesota is above average in management of pension plans. Deloitte also noted that other states, employers generally pay twice as much as employees while in Minnesota the ratio is closer to 50/50.

Rosen said that Frans will return next week for additional testimony regarding pension finances.

Courtesy of Minnesota TRA