heard that the school districts in our country face a gigantic shortfall in
their pension funding. What's to be done?
According to the American
Legislative Exchange Council, school districts should change the way they
structure their pension plans, or we will be buried by ever-increasing
requirements to keep pensions funded. They recommend changing from "defined
benefit" pension plans to "defined contribution" plans.
pension plans with a defined payout ("defined benefit plans") are
good only for government workers who spend 20-30 years with the same employer. At the point of retirement, the pension benefit is calculated in large
part by using the average salary from the previous two or three years' work, or
by using the average salary from two or three years in which salary was
highest. That makes the maximum payout possible only to employees who earn
substantial income. In government service, senior employees have the highest
retirement investment plans ("defined contribution plans")
benefit both senior government workers and younger employees. Defined contribution plans are similar to 401(k) plans widely available
in the private sector. They are portable between jobs and career choices - as
they are often administered by a private, unaffiliated entity - and investment
earnings can be consolidated into an IRA or similar account should the worker choose
to leave public service.
no limits to the benefits an employee may earn in a defined contribution plan. This is especially beneficial to government employees who remain their
employer less than 5 years - nationally, roughly 40 percent of defined benefit
plans require more than 5 years of service before and employee is vested. With
self-directed investing responsible for retirement earnings, the individual
controls how much or how little risk he or she is willing to take on.
Therefore, his or her earnings at retirement will reflect personal choices rather
than choices made by plan administrators.
contribution plans benefit taxpayers as well. The potential for unfunded future liability looms with a defined
benefit plan. If plan administrators make poor choices, are influenced by
political or social whims, or if the general marketplace declines, and returns
on investments are less than promised in the defined benefit, taxpayers are
stuck with the bill. On the other hand, defined contribution plans are fully funded
from the very beginning.
plans are a valuable recruiting tool for government agencies - and an incentive
for young workers to enter public service. Short, or in
some cases, immediate vesting schedules, and portable retirement benefits are
why defined contribution plans are attractive to younger employees.
are some good articles on pension reform from a Michigan think tank: