Listen to the audio here:
Read interview transcript here
Nari Rhee, Director, Retirement Security Program, UC Berkeley
Nari Rhee, Ph.D., is Director of the Retirement Security Program at the UC Berkeley Center for Labor Research and Education. Her current research focuses on the retirement crisis facing California and the US in the context of declining pension coverage, and policies to improve the retirement income prospects of low- and middle- wage workers. Before returning to the Labor Center in November 2014, she served for two years as Manager of Research at the National Institute on Retirement Security. She formerly held appointments as a Postdoctoral Scholar, Visiting Scholar, and Associate Academic Specialist at the Labor Center. Dr. Rhee has written on a wide range of issues related to pensions and retirement security, including public pension reform, international pension systems, and retirement plan design. Her analysis of the retirement savings crisis and its racial dimensions has received broad media coverage and informed policy debates at the state and national levels.
Dr. Rhee’s previous work engaged a range of issues related to the economic security of low-wage workers, including care work, income inequality, housing affordability, uneven regional development, and labor-community coalition building. She earned a Ph.D. in Geography from UC Berkeley in 2007, an M.A. in Urban Planning from UCLA in 1998, and a B.A. in Anthropology from UC Santa Cruz in 1996.
Pat Crowley:
PC: Hello, I’m Patrick Crowley with the Kentucky [Retired] Teacher’s Association. Today we’re interviewing Dr. Nari Rhee, Director of the Retirement Security Program at the UC Berkeley Center for Labor Research and Education. Dr. Rhee earned a Ph.D. in geography from UC Berkeley in 2007, a Masters [Degree] in urban planning from UCLA in 1998 and a bachelors in anthropology from UC Santa Cruz in 1996. Dr. Rhee’s research focuses on the retirement crisis facing Americans in the context of declining pension coverage and policies to improve the retirement income prospects of low and middle wage workers. Dr. Rhee has written on a wide range of issues related to pensions and retirement security, including public pension reform, international pension systems, and retirement plan design. Her analysis of the retirement savings crisis has received broad media coverage and informed policy debates at the state and national levels. She’s with us today to discuss her new report, “Most Kentucky Teachers are Significantly Better Off with Pensions than 401k’s.” This report particularly important given the recent and highly controversial pension changes in acted here in Kentucky. We’re very anxious to hear about this today. So, Dr. Reece. Thank you for joining us.
Dr. Rhee: Thank you for having me.
PC: So, tell us about your report, uh, why did you develop this study and what were the main findings?
Dr. Rhee: So, to just give a little background, I had originally run the same kind of analysis in California on CalPERS, in response to I think a sort of growing discussion and some studies that have been put out across the country saying that teachers are better off with a 401k than a traditional pension and most teachers in the US are covered by a pension and also a lot of them don’t have social security. And what I basically did was take a look at the actual teaching workforce in terms of how long they are expected to work, and then project out, well, what kind of benefits are they going to get from their existing pension versus a very idealized 401K, where there’s even without even taking into account investment risk and investment mistakes, you know, how do the two benefits stack up given current career patterns in the teaching workforce. And that’s effectively what I did for Kentucky.
PC: Okay and you had four key findings. Can you walk us through those for us?
Dr. Rhee: Yeah, so the first one, and this is important because we know that there is early career turnover is pretty high among teachers because they’re trying to figure out if this is a job that they can stand on and it’s a pretty tough job, but what I found is that two thirds of the classroom teachers currently teaching in Kentucky will serve at least 20 years in the state. That is based on the current actuarial assumptions that are based on studies done by the teacher retirement system. And so a typical classroom teacher working today can expect to separate from service at age about age 55 and half of current teachers can expect to accumulate at least 26 years of service by the time they leave. So, what that says is that most Kentucky classroom teachers are in it for the long haul and they can expect to teach in Kentucky for a long time. The second finding is that this long career longevity is being driven by, in large part, the pension design. And so that defined benefit pension that teachers get, helps retain experienced teachers by encouraging them to stay until at least early retirement age when their benefits become more and more valuable. And so what this means is that for a 76% of Kentucky teachers, their TRS defined benefit pension delivers greater, more secure retirement income compared to even a very idealized 401k, assuming equivalent cost. And finally, for a typical teacher working today, who’s going to separate at age 55, with about 26 years of service, it would cost 48% more to achieve the same retirement incomes through a 401K as they would from their current TRS pension.
PC: That last point is jarring to read. I mean that is a big number.
Dr. Rhee: Yeah, it is a big number. And it has a lot to do with the efficiency of the defined benefit pension design because you’re pooling a lot of participants and you’re pooling a lot of risks. And so typically defined benefit pensions will just be able to generate higher income. They get somewhat higher investment returns. Right? And also, you’re not paying insurance companies to take on the longevity risk of providing lifetime income and you’re not having to self-insure by basically reducing your account withdrawals just in case you live, you know live to be 95 or 100. Right? So, it just costs a lot less to deliver retirement income through defined benefit pension.
PC: Yeah, that is a great research point. So, Dr. Rhee here in Kentucky the pension bill that was in acted by the general assembly and signed by the governor is going to move teachers to a hybrid plan. I don’t think many people have ever heard of a hybrid plan before, we started talking about it here in Kentucky last fall. What is the hybrid plan and basically is this a good deal for teachers?
Dr. Rhee: So, there’s several different kinds of hybrid plans and all that term means is that is combine some of the features of a traditional pension with some guarantees, but also some of the features of a 401K type account where, where teachers take on some risk. So, the hybrid plan that was passed in Kentucky is what’s called a cash balance plan. And what it means is that the teacher is paying a certain amount every year, it’s about 9.1% of pay. And the employers, they don’t exactly pay in, they credit the account with the equivalent of 7.5% of pay, and then they get a variable interest rate that’s tied to the plans investment performance, and there is a floor of zero. But also in years, if you take some time off to say, you know, take care of a baby and come back after a couple of years, during those years, not only do you not pay in, you also don’t earn any interest in that time, so there’s a bit of a penalty for – honestly for working mothers. And so that’s very different from the traditional pension where you know that if you work to a certain point and get a certain number of years of service under your belt, then you get a one-sixth [of your] income with a COLA – for the rest of your life. This is really – the way that the credits stack up is closer to a 401K system. It’s just, there’s a little bit more risk protection than a typical 401K.
PC: So, it waters it down a little bit.
Dr. Rhee: Yeah, It’s basically a very watered-down pension. But there’s another feature of the plan and that’s really important. It’s not just that the benefits are less, less guaranteed or less generous. There’s actually a huge shift in benefits. So, what the defined benefit pension does is it basically reserves the greatest benefits for people who stay a long time. And so that’s what helps keep experienced teachers in the classroom, because it provides a, a huge economic incentive to do so. And in doing so, it reduces turnover among experienced teachers. And what’s the cash balance plan will do is it will, it will boost the benefits of teachers who leave after, you know, after five years or after 10 years compared to the current pension. What it will also do is for the teachers that stay a long time on say 20 to 25 to 30 years, it’s going to actually wind up really reducing the retirement income compared to the lowest tier. Traditional pension that current teachers have access to today. So, for instance, if you start at age 30 and you stay until 25 [years of service], you’re going to get about a 20% reduction in benefits compared to the current, uh, for new hire teachers, they’re going to get 20% less benefits than a similar teacher who was hired before this bill took effect. And then if you work actually a full career, 30 years, you’re going to get about 30 to 40% less retirement return.
PC: Excuse me for interrupting you but when this word started getting out about the impact of this bill. It’s going to have to affect recruiting teachers into the state.
Dr. Rhee: Well, it, it, it’s going to work in a couple of different levels I think. So it’s important to realize that, what’s really important in teacher workforce stability. There are two pieces, one is that kind of recruitment piece, but also, it’s really the retention piece and so with the retention piece, that’s where the DB pension, the traditional pension has the greatest impact. And so it’s, it’s arguable whether or not this is going to have an impact on overall recruitment. But what I can say with near certainty is that this is going to increase turnover among experienced teachers that’s going to create a greater need to recruit more and more teachers and it’s going to actually drive up recruitment costs and it’s going to drive up. Well, it’s going to drive down, honestly, sort of the quality of public education because what you’re doing is you’re incentivizing teachers who have experience in Kentucky in that district and that classroom, to leave. So that’s going to be, I think, you know, there’s going to be a retirement income security impact, that’s really negative for most of the teaching workforce and you’re going to actually have a pretty big impact on turnover and sort of stability in the classroom.
PC: Sounds like one of the unintended consequences that maybe wasn’t fully vetted as this bill went through the process. Let me switch to retired teachers. How do you see this hybrid impacting the retired teachers in terms of finances, of financing teacher pensions, which is underfunded now? Is, is this going to help or hurt that situation?
Dr. Rhee: Well, so the bill doesn’t, it doesn’t really explicitly touch retired teachers’ benefits, but what the bill does do is compromise the financial position of the existing pension. So, what the state is essentially doing is saying we’re closing the existing defined benefit plan and we’re going to place new employees into a cash balance plan and over time that means fewer and fewer people paying into the pension fund and for various reasons, what that’s going to mean over the long term is that you can, you’re going to have to reduce the expected investment return on that pension fund and that alone will drive up costs, right? So never mind, you know, whether or not there are new employees paying into it, it’s really just surely if you’re going to basically have a plan that’s going to age more and more and more because you’re cutting off the flow of new members, you’re going to have to cut back the risk on that portfolio. And that means you’ve got lower investment returns, which is going to drive up costs. So, for retired teachers, that would be the main thing to be concerned about with the spill is what does this do to the financial position of the existing pension.
PC: Great. Alright. Excellent analysis, Dr. Rhee, any final points? Anything else you’d like to say or I failed to ask you?
Dr. Rhee: Well, I just want to emphasize that what the legislature did with, what appears to be, not a very complete analysis of the impacts, is enact a program that’s going to: hurt the retirement security of the state long-term teachers, and is likely going to increase turnover in, in school classrooms. And I think that’s something to be concerned about over the long-term.
Pat Crowley: Yeah, it sounds like we may be revisiting this bill, uh, in future sessions with the Kentucky General Assembly. Dr. Nari Rhee the Director of Retirement Security program at UC Berkeley Center for Labor Research and Education. Thank you so much for your analysis and for joining us today.
Dr. Rhee: Thank you.
PC: For the Kentucky [Retired] Teachers Association, I am Patrick Crowley. Thanks for tuning in.