Posts filed under ‘The Pension Trap’
A Blogger’s Reflection
Five years ago, I started the SchoolsRetooled blog and began to gather my thoughts on the US PreK-12 Education Delivery System and, more specifically, urban education. Periodic stints back in the classroom have put the blog on hiatus, and it flagged quite a bit after a family tragedy a couple of years ago. But I stand by my initial vision for education reform, not as a call for competition but, rather, a renewal of the system itself to create the capacity to fully integrate 21st Century innovations and continue to evolve toward excellence.
In December 2011, near the end of my first year of blogging on SchoolsRetooled.com, I published Seven Keys to Education Reform. In this 10-page summary of my approach to system reform, I identified seven levers of change that could improve the system’s functioning by getting more information from data systems, taking a broader view of pedagogy, streamlining organizations around the mission of educating the children, and providing incentives for common ground among educators and between educators and the communities they serve. Beyond organizational dynamics, my thesis presumed an absence of fault on behalf of any of the participants in the education system and, in particular, an end to ageist scapegoating.
In the years since then, policy conflicts defined by political affiliation have shaped the conversations among educators, much to my dismay. My biggest disappointment has been the extent to which the goals of No Child Left Behind (NCLB) were allowed to slip away and the 2014 deadline passed unnoticed. The Obama Administration relaxed the accountabilities, pushing for the Common Core State Standards and advancement of teacher evaluations. Conservatives renewed their support for competition for public schools, choosing incubation of ideas in charter schools, often with private bankrolling.
By the time ESEA was renewed late in 2015 bipartisan support was achieved in the Every Student Succeeds Act (ESSA) with very little prescription for how this would be ensured. The clearest policy directive was the prohibition on any further Federal intervention in accountabilities that the legislation defined as states’ rights. The legislature was ruled by Republicans in both houses; the Obama activism in lieu of overdue ESEA renewal was over.
I continue to believe in system reform. The quiet period after the passage of ESSA allows me to reflect here on progress made with my own agenda as well as initiatives needed in the future.
On no-fault education reform…
Education reform has evolved such that rhetoric is less about frenzied reactions to missed targets for student achievement on high-stakes tests and more about opportunities for concrete system improvements and real school transformations. However, the worst performing districts often remain trapped in blame-based failure cycles. They will not be able to get out of their own way until they become more inclusive in their solutions, recognizing their allies and working in concert rather than with antagonism and derision.
On a student-centered data system…
Data systems have shown great strides within education, but they are not student-centered. ESSA authorizes a limited number of districts to experiment with student-centered accounting, but they focus only on the revenue stream, not really addressing matching of revenues to expenses at the student level. I continue to believe that we will not be able to manage student outcomes effectively until both sides of the equation are in synch. Once the money is at stake, school systems that are reluctant to embrace the challenge of student-centered accounting will realize its necessity. Data on student outcomes and teacher effectiveness will follow logically.
On broad-based pedagogy…
Software is beginning to catch up with the structural changes in hardware and data. This bodes well for implementation of blended learning, which balances digital resources with tradition methods. In addition, personalized and competency-based learning can be realized with greater potential for educators and students to share management of the learning process.
Educators are accepting technology that combines attendance, assignment completion, and grading in databases that can also support student portfolio development. In addition, these same platforms support collaborative projects that can be pursued and documented on shared platforms. Textual content is available digitally, and learning is becoming an interactive, multi-media experience. Student support is routinely enhanced with multisensory digital options and close-reading strategies.
On alignment to mission and benchmarks…
There have been many experiments in school transformation; however, reorganizing the actual schools has not been a priority yet. I believe this will happen organically as data systems provide better information on student outcomes.
On performance incentives for Special Education…
New Special Education guidelines from Federal regulators have shifted emphasis toward student outcomes. This promising development should help to accelerate progress toward grade-level proficiency. I continue to recommend earlier student involvement as members of their education planning teams, but there has not been much movement in that direction. For now, younger students tend to be present more so if they have disciplinary hearings than for prospective planning sessions.
On school leadership and general management…
A couple of years ago, the time seemed ripe for two trends to deepen. The first was the emergence of empowered parents demanding a voice in troubled schools. The second was the trend toward education schools entering joint ventures with their management school counterparts within major universities.
Threats of parent trigger interventions have given way to mayors and school district leaders joining to speak with one voice, a more politically savvy voice that recognizes the importance of community members proactively. The university-based collaborations have gotten caught up in concerns about educators finding a back door to access to highly competitive MBA programs. I suspect the long-term solution will be dual degree programs that require admission to graduate programs in both the business and education schools.
On portable pensions…
The issues around underfunding of pension plans continue to dominate the conversation, and most actions are currently being focused around solvency. Unfortunately, the recommendations are more likely to be made by those who have mismanaged the programs historically. The pension beneficiaries have continued to be called out for reasons that baffle me – they are the only people who have given up their pay to the fund without fail through the whole fiasco – and ways to eliminate funding shortfalls that reduce obligations to the pensioners get more traction than ways for the government employers to pay back their missing contributions to their employees. This is particularly troublesome when government entities got holidays from making their contributions in lieu of Social Security, something that would never be allowed in the smallest of entrepreneurial businesses.
On financial incentives linking educators to performance…
As I stated originally, validated educator effectiveness reports need to precede merit-based pay. There has been significant progress in teacher evaluations and leadership performance assessment. However, there is more work to be done, which necessitates postponing this objective for a while longer. The recent developments in technology cited above should offer greater options for multiple measures of educator performance, a key to getting beyond controversial value-added test scores as the proxy for overall effectiveness in schools.
On valuing people of all ages…
The fervor has died down over targeting veteran teachers as the source of all evil in education, and the conversations around accountability for test scores alone have softened. That said, charters schools continue to be organized with an unwritten rule against hiring teachers beyond a fairly young age. Teach for America and other similar programs continue to be granted exemption from teacher prep rules, giving an edge to youth-oriented private organizations that funnel a revolving door of teachers into public systems. As these groups mature, they are demanding a greater role in leadership at the risk of stifling the voices of educators with a deeper commitment to schools and important insight into the issues.
The Pension Debacle Demands Resolution
Don’t blame public employees…when their government employers fail to deliver on matching funds for pensions. But do worry about funding for education and every other government service that will be crowded out by these overdue pension contributions when the piper is finally paid. Modern day Robin Hoods would continue to steal from the middle class and give to the ultra-rich…let’s find a better solution.
Forbes has published an article with devastating news about underfunding of state public pension benefits…a whopping $4.7 trillion shortfall in funding as of 2014. And the number has grown from $4.1 trillion in 2013. The only mystery in the growth in unfunded pension benefits is why anyone is surprised. There is no growth in the value of $0 in funding regardless of how many decades have passed since the government gave itself each pension holiday…only the obligations linked to the increasingly shaky promises.
Let’s cut to the chase…
- Government entities must stop balancing their budgets by pilfering from employee pension plans, i.e., they must make their contributions to pension funds in the same period in which pension obligations are incurred.
- Government pensions must be made portable – #2 in 7 Keys to Education Reform since 2011 – that is, convert from defined-benefit plans to defined-contribution plans for at least new employees, and enroll employees in the Social Security safety net.
- Pension managers must reassess predicted returns on invested pension funds and create realistic schedules of future payouts under existing defined-benefit plans. These schedules must reflect real dollars contributed by employees and both real and imagined dollars (with interest) promised by governments.
- Wall Street must re-engage in capitalism and invest in stocks with long-term shareholder value propositions…no more unproductive financial instruments or built-to-flip bubble machines.
Deficit funding of pensions by government entities
Government pension systems are allowed to have deficit funding. This means that states can incur pension obligations that they do not match with actual funding. And that underfunding grows over time because the assumed return on investment for the promised funds grows over time. This should be a no-brainer. However, as government budgets become politicized and public officials try to dodge the issue, the images of alleged fat-cat union pensioners have become the face of the problem. They are the last people who would deserve blame.
Public employees who belong to pension plans typically make mandatory contributions beginning with their first paychecks even as very young adults. And they continue to pay their share into the pension plans throughout their careers. In fact, such pension plans, often taking 10% or more in payroll deductions from every check over a lifetime, are likely to eat a larger chunk of personal income than private sector retirement plans because employees start earlier at a higher rate and are less likely to be able to alter or tap into these funds. The promise of a good pension is an important part of continuing employment in government services and a secure middle class existence.
Unfortunately, government pension plans have been managed with kick-the-can financing to the point of questionable solvency unless pensions are reduced or other government services are cut. Again, politically, conservative solutions are about choosing how to hold the victims accountable. And to complicate matters, deficit funding is only part of the problem.
Complications with invested funds
Defined-benefit pensions schedule payments to retirees according to a combination of years of service and age at retirement. Implicit in these schedules are considerations for funds contributed and the performance of investments made by fund managers. The collapse of world financial markets in 2008, slowing of the economy, and volatility in technology and other stocks created a shock wave of uncertainty with pension funds. It also cast a light on some risky investment activity on the part of funds managers.
In denial, pension managers were slow to adjust expected payments to retirees in response to new market behavior. They continued or even intensified unwise gambling on high risk/high return investments, losing more money even as outdated pension benefits further depleted available funds.
Defined-benefits v. defined-contribution pension plans
Defined-benefit plans, which promise payouts to retirees, cannot expect to make their payments in the long run without a major change is policy. On the employer side, failure to make promised contributions means that states have balanced their budgets by pilfering from their employees’ pensions. Essentially, government entities just have to stop doing that. And they must take steps to bring promised funds up to date.
On the employee side, immediate solutions to the new market conditions are likely to mean higher contributions from workers and/or lower payout rates as well as raising the age of eligibility for retirement benefits. However, this is a good time to reconsider closed, defined-benefit retirement plans, and to limit the size of the tail on unfunded benefits.
Closed government pension plans presume lifelong government service and limited geographic mobility within a given pension plan. This is not relevant to a mobile society, and there is no equity for workers who fail to become vested in a plan. Going forward, an open, defined-contribution plans would better serve employees overall. In addition, they would transfer more control over the amount and the risk/return profile of invested retirement funds to the workers themselves. A sunset clause on defined benefits would create a finite limit for the long-term pension liabilities.
Finally, employees bearing the risk for their retirement plans must be enrolled in the Social Security safety net. No new employee should be allowed to join the 6 million Americans grandfathered into plans with Social Security opt-out clauses.
US economy at a cross-roads
At the heart of the problem, the US economy continues to lack vitality. Attention to Gross Domestic Product and a clear vision for market dynamism are essential for all of us to thrive. The promise of supply-side economics was made hollow by offshore investments, and cash in reserves continue to languish on corporate balance sheets because no one seems to know where to put their money.
We have wasted the savings of a generation on market bubbles and unproductive assets. And a derisive attitude toward domestic workers has undercut consumer markets – an underemployed sector that cannot buy. One side of the economy cannot be optimized with a nostalgic vision of cheap production at the worker’s expense. Demand-side economics must receive its due to balance the equation. And this does not mean better social networks and subversive advertising. Rather, it means real people with real lives and futures working in an economy that serves them, too.
The Pension Nudge
School systems and other government pension sponsors are considering the move to defined-contribution retirement plans. A simple nudge can help enrollees sustain their investment levels through the transition.
The nudge is a one-step opt-out plan in decision architecture that can help people do the right thing. Richard Thaler and Cass Sunstein wrote a book about it, citing its use in everything from cafeteria design to travel safety. Retirement savings offers a simple example.
As retirement systems convert from defined-benefit to defined-contribution plans, the easiest way to nudge enrollees toward maintenance of contributions is to offer it as the automatic choice in payroll deductions. Essentially, unless the enrollee does something to stop it, there will be an automatic continuation of the same payroll deduction for retirement. The money will go into an account supervised by the employee instead of the pension board, but the value of contributions will be the same.
Seems like a no-brainer, but the act of initiating a new contribution is an obstacle to continued savings. Making that obstacle the act of opting out of the automatic deduction will be better for employees in the future.
Pensions, Social Security, and the Fiscal Cliff
Government pensions need to be portable, but who will finance the tail of legacy plans? And what about a safety net for government workers from Social Security opt-out states if they convert to defined-contribution plans? A creative solution addresses both, offers tax relief to high rollers, and increases the life of the Social Security trust fund. Too good to be true?
It seems as though the time to address government pension fund solvency may have arrived…a little late, but better than never. At the risk of sounding like a broken record…
- Convert government pensions from defined-benefit to defined-contribution plans, either for all new employees or all non-vested employees.
- Enroll employees affected by the conversion in Social Security.
- Create a tax-free bond that government entities can issue to pay for the tail on legacy plans.
Closed pension systems are inequitable. Portable pensions allow for mobility, which is part of the new reality among employees. In addition, flawed accounting rules have allowed government pensions to be managed under conditions of insolvency. It is urgent that we fix these problems now.
Employees saving for retirement under defined-contribution plans will bear the risk for their pension funds. They will need the Social Security safety net. Opt-out states like Massachusetts and Illinois need to have sunset clauses on their alternative plans. The Feds need to allow for transition into Social Security rather than an all-or-nothing rule.
With only the vested employees paying into the system, legacy plans will run out of money in the not-too-distant future. Government sponsors will need access to low-interest borrowing to pay off the last of the pensioners’ benefits. Wealthy investors desire tax relief and this may be a way to finesse the situation.
On the issue of the fiscal cliff…An interest tax shield would be a palatable give-away to the rich. The tax-free bonds would not have to be issued immediately, so the fiscal impact would be low at present (although now is a great time to lock in low rates). And it would save pensions for millions of American workers.
Enrollment in Social Security would be a fiscal win, too. The new enrollees would have a lower average age, which would mean there would be an immediate increase in contributions to the Social Security trust fund while the payments to new beneficiaries would be decades away.
Just saying….again.
New PreK-12 Education Priorities for the Returning Obama Administration
The Common Core State Standards, NCLB waivers, and Race to the Top initiatives have altered the landscape in education in the absence of an NCLB rewrite. On this day of reflection after Election 2012, I offer a few thoughts on resetting policy priorities until ESEA renewal becomes feasible.
Entering the 2nd term, in my humble opinion, the Obama Administration could benefit from raising the priority of three issues in PreK-12 education…
- Decision architecture for education finance, reporting, and analysis
- Federal support for government employee pension reform
- Incentives/accountabilities for grade level proficiency for students in general or special education and students who are English language learners
Decision Architecture
The Race to the Top program (RttT) has instructed states and districts to design new approaches to student funding, teacher effectiveness, and student outcomes. Having completed the idea generation phase for reinvention of the decision architecture within education authorities, it is time to draw expertise from beyond traditional regulatory compliance models. Educators need to learn from non-education sources with more expertise in aligning information and analyses to the mission of educating children efficiently and effectively.
The finished products should draw on the best of the general industry models and those presented by RttT exemplars. They should include a standard for financial reporting that is student-centered as well as data elements to be automated in support of teacher effectiveness and student outcome reports.
Pension Reform
Government employee pensions are straining fiscal resources while yielding inequitable benefits for plan participants and limiting their career mobility. Current retirees and vested employees need security with their defined-benefit pensions. Separately, the wisdom of continuing to underwrite such pensions in the future needs to be assessed. However, any introduction of defined-contribution pensions for new or unvested employees would result in eventual bankruptcy for legacy plans.
The Federal role in the issue could be one of mitigating the financial crisis in pension funding. Changes to the tax code could lower the effective cost of borrowing for sponsors to meet pension obligations. In addition, elimination of the Social Security opt-out would extend the safety net for employees switching to higher risk, defined-contribution pension plans. A prior post discussing this issue can be found here.
Grade Level Proficiency
When redefining the data elements needed for measuring student outcomes, Federal regulators will need to keep in mind new targets and deadlines for general grade-level proficiency among PreK-12 students. Longitudinal tracking across content areas will need to be enhanced significantly, especially to ensure that students receiving services in Special Ed or ELL programs are demonstrating accelerated progress in response to accommodations and modifications.
This shift in emphasis should create incentives to move beyond regulatory compliance to demonstration of real benefits for students, a continuation of the work announced in an Education Department notice available here.
Other items on the Federal agenda…
Meanwhile, teacher preparation does not need to be such a high priority on the Federal agenda. Educators are being trained under a variety of conditions ranging from rigorous 5-year programs that combine baccalaureate and master’s degrees to boot camp immersion programs or online courses with limited apprenticeships. Aggressive evaluation of the most highly structured programs exclusively is both unfair and at risk of overestimating the state of the art in actual practice. In addition, success has been seen with many teacher prep models, raising doubt that the problem lies with the pipeline of new teachers.
Rather, a crucial lapse in quality arises because individual schools and districts show uneven results with their ability to keep teachers in top form professionally throughout their careers. That is a local problem that is being addressed retrospectively through the teacher evaluation process. Prospectively, Federal regulators should consider grants for demonstration projects to introduce general management and human resource expertise from general industry into education leadership development.
Resolving the Pension Problem
Teacher’s pensions have devolved into a hornet’s nest of woes for government sponsors, unions, and beneficiaries. However, a solution may lie in matching unlikely bedfellows: government pensioners and the richest 1% of citizens who might just be willing to fund their benefits in exchange for tax-free bonds. It is one of the few win-win scenarios available in this picture.
Teacher pensions have created a dilemma for many districts and unions. Traditional pensions for teachers are not portable, so teachers cannot reap benefits unless they stay in one retirement system long enough to reach the 30 year tenure/55 year age threshold. For those who do achieve full eligibility, pension funds often are seriously underfunded.
Alternative plans cannot fix the problem alone. 40lK-type plans offer portability, but any shift of savings to a new plan will create additional underfunding of legacy plans. In addition, they are too risky for teachers in states that have opted out of the Social Security safety net. Employers will need to enroll staff in Social Security and both will need to make contributions. Regardless, pension sponsors will need a source of low-cost borrowing to meet obligations.
Tax-free bonds have been proposed as a low-impact borrowing source for government sponsors of unfunded pension obligations1. Essentially, the tax-free status will lower the effective interest rate for borrowers while offering tax-sheltered income for the lenders.
I am not often a fan of tax benefits for the rich. However, this is a case of the ends justifying the means. The dual goal of keeping retiree benefits intact while achieving greater equity among teachers in their access to pensions must be served. And who better to do this than the rich who, by the way, need to be co-opted? Otherwise, they tend to be most likely to favor a plan of privatizing education and cutting off retirement prospects for the displaced veteran teachers.
1Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester via “Solving the Pension Puzzle”
Balance Sheets for Schools
Too many financial and facilities decisions are made under duress as school districts respond to critical needs that cannot be avoided. Often, competing needs that should have been considered arise soon after the ground is broken for a new building or a new round of debt financing has been completed. The process of allowing a district’s priorities to bubble up to the surface should be replaced with school-based balance sheets that allow a prospective and transparent look at the asset base for every education facility.
School districts make decisions to add new buildings or enhance old ones, often in isolation in response to critical needs. Each project is vetted publicly, but the opportunity cost of the choice often is only revealed after the fact. Districts need tools to strategically manage their portfolios of facilities, intending their investments in each and every school. And their choices need to be made with transparency for oversight by regulators and constituents.
Filing a complete financial balance sheet for every school is a fundamental requirement to support such an analysis on an ongoing basis. Similarly, debt is assumed by cities, towns, or school districts for capital outlays, pension funding, and operating cash needs. By matching the debt to schools, they can get a better picture of whether they are investing in the future, or mortgaging it.
Each school needs a solid asset base, current solvency, and long-term viability. Its age, benefits of modernization, and safety as a standalone structure should be known at any time. This does not mean that we should ignore the benefits of a balanced portfolio of shared resources…only that we must know the value of the home base for any group of students. And we must know the system’s exposure to risk at each facility as well.
Making Teacher Pensions Portable
Point #2 of my Seven Keys to Education Reform calls for portable teacher pensions. Many teachers would benefit from career mobility to keep themselves energized professionally. To date, those who have needed to move on, within or out of the profession, could only do so with severe financial penalties. Meanwhile, union pension fund managers have faced fears of insolvency due to underfunding as well as early withdrawals. The good news is that real solutions are being proposed.
Most news stories about state and municipal pension funds do not have happy endings for anyone. A piece from my Kellogg alumni magazine offered a pleasant departure from that trend. Professors Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester have co-authored a solution to the puzzle…
“…that states be allowed to issue tax-exempt bonds to pay off their pension debt. But state would only qualify for the tax exemption if they agreed to place new employees in defined contribution 401 (k) plans rather than traditional pensions. All new hires would also be eligible for Social Security.”
This proposal addresses several of the issues raised in my earlier post, Trouble with Defined-Pension Funds, and is only one of several remedies suggested in the full text of the article. I recommend it.
Trouble with Defined-Benefit Pension Funds
Pension funds scarce and getting scarcer
“The N.J.E.A. – the teachers’ union – decided to launch its first strike in the coming battle when it obtained what it said was a list of the recommendations that will be in the final report of a pension study commission…Edithe A. Fulton, president of the association, said that some of the proposals ‘represent the most outrageous assault ever attempted on the state pension system’…According to the teachers’ association, the proposals would raise retirement ages, lower benefits, increase premium co-payment requirements for health care and penalize those who retire early… At present, a person retiring at age 60, with 20 years of service and a final average salary of $28,000, would receive an annual pension of $9,333, or about $777 a month. The new formula would reduce that to $3,242, or about $270 a month.
The February 19, 1984 edition of the New York Times foretold of an upcoming debate over management of under-funded teacher pensions in the State of New Jersey. The numbers are quite different today, but the story is sadly similar. Unfunded pension benefits, once thought to be an artifact of 1980s stagflation, have reared their ugly heads again. While the nature of the problem seems similar on the surface, a number of differences will make the solution much more difficult this time around.
The problem in 1984…pension funds had gotten into trouble after years of inflation and a relative absence of economic growth in the US. By the early 80s, inflation topped 18%, and this high cost of capital meant greatly discounted pension fund valuation. As retirees lost private benefits, Congress reconsidered the Social Security Opt-Out provision of ERISA and added benefit protection for private beneficiaries. However, the greatest amount of relief came in the form of lower inflation. By 1986, the slow, painful stagflation scenario had played itself out and discount rates began a rapid decline. Fund balances were adjusted upward and the stock market grew. A problem of supply of funds was resolved with market-based renewal of that supply.
Fast forward to the current situation…During periods of unprecedented growth on the stock market, flush fund managers had allowed pension trustees to pay out generous benefits to retirees. Defined-benefit plans created schedules of accruals that presumed these conditions would continue indefinitely. As we now know, the market conditions were buoyed at least partially by fraudulent financial vehicles and imprudent behavior. The world economy has stalled and volatile market behavior has made fund valuations more difficult. Interest rates are already low, and inflation fears only make the situation more ominous. Essentially, there is no chance of a magic pill in the form of a market-based improvement in the supply of pension funds. Our greatest hope lies with long-term growth in the economy that must happen over time.
To complicate matters, Baby Boomers are becoming eligible for benefits in record numbers. Even as pension funds become scarcer, this new level of demand for pension funds is accelerating. The solution to the problem necessarily relies on artificially increasing the supply of funds or moderating demand. The former would mean adding money to the pot from public or private sources, i.e., government bail-outs or increased employee contributions. Demand reduction would mean postponing eligibility for benefits or reducing benefit payouts. However, defined-benefit plans limit flexibility for benefits that have already accrued for existing employees.
Several states and municipalities have moved to stop offering defined-benefit pensions to new employees, choosing instead to offer defined-contribution plans such as 401K or 457 plans. The relief offered by such changes will not be adequate to prevent the looming financial crunch for retirees. Nevertheless, it will allow future retirees to have more control over their money and timing in a proactive way.
Now, back to the 80s…when the Social Security safety net was restored. In 1983, Congress put an end to government workers opting out of Social Security. Because of a grandfather clause, about 5 million Americans still do not participate in Social Security. As the mantle of control over solvency in old age gets shifted to the individuals in private plans, perhaps it is time for the hold-outs to opt back IN to Social Security.
SchoolsRetooled TM 