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Diane Oakley, Executive Director for the National Institute on Retirement Security
The National Institute on Retirement Security is a not for profit organization that does nonpartisan research to address what a quality retirement means for employees, employers and the economy. Diane Oakley, Executive Director at NIRS joins Pat Crowley, a former Kentucky journalist and current representative for the Kentucky Retired Teachers Association to gain perspective on the challenging retirement outlook in Kentucky.
The conversation between Diane and Pat dives into a failing public-workers pension system in a Florida city that saw a large percentage of their trained workforce leave or retire after switching away from pensions for retirement – among other problems, a look into West Virginia’s struggles after switching from pensions to 401k-type plans then back to pensions again, and why abandoning the pension plan “does absolutely nothing to address the unfunded liability.”
Diane also covers why pensions keep experienced teachers in the classroom, explaining, “they’re there, they want to teach, they know how to teach and they deliver a good education to our students.” Then, addressing what offering a pension plan says to prospective teachers and employees, “we want you here for your career and we are willing to make the investment in you over the long term.” Finally, in reference to the $807 million tobacco settlement that West Virginia dedicated to their state’s pension plans, Diane says, “when the state had some unexpected resources… they made a decision to put that money into the teacher pension because… getting a good education, getting good teachers in the classroom, all of that is paramount to having a more productive economic community.”
Pat Crowley: Hello I am Patrick Crowley I am with The Kentucky Retired Teachers Association and this morning we’re talking to Diane Oakley who is Executive Director of The National Institute on Retirement Security. Diane, thank you so much for joining us today.
Diane Oakley: Thank you Pat. I am happy to be with you.
PC: Okay, I want to get some of your perspective on the situation we have in Kentucky but first tell me about your organization. What does the National Institute on Retirement Security do?
DO: The National Institute on Retirement Security is a nonprofit nonpartisan organization that does research on retirement security and the value that having an adequate retirement brings to employees, employers and the economy as a whole.
PC: Okay, so in the scope of your work and through your background, I know you’ve been in financial services and looking at this issue throughout your career, even worked on the hill as well. What’s the overall retirement outlook for Americans right now?
DO: I guess the best way I could describe it is challenging. To be very honest, for a lot of working families many find it difficult to save for retirement for various reasons. Some of that is a number of people do not work for employers that offer 401(k) plans, or any type of retirement plan.
We’re just getting ready to do some research on young people just coming into the workforce and a lot of them, even though they work for an employer who offers the plan to its employees, they may not be in a job category that’s eligible for the plan, or they may not have been there long enough to be able to participate. So those are all key issues.
The other thing I would say is, again, Americans have been left on their own and one of the things that comes out of that, that I think has to give all of us pause too. How successful was this experiment with 401(k) plans? When we look at the baby boomers who are still in the workforce, those people predominately between ages 55 and 64, we found a couple years ago that their medium retirement savings, so this is the savings of the typical household in that age bracket, is only $14,500. And that’s just not going to be enough to last throughout their retirement years. And those individuals, you know, they’re closer to retirement, they don’t have the benefit of being able to have many years of putting away money and then more years of relying on compound interest to make that money grow better.
PC: Yeah and there’s a lot of change in the industry or in the retirement systems, which is something we are going to talk about in Kentucky in a minute, but let me ask you. I understand that the institute has recently released a case study about a town in Florida that switched its public employees from pensions to a combined plan with a watered-down pension and a new 401(k) type account. It sounds like this change triggered a big exit of several employees. What happened here?
DO: You know, it really is an interesting case study. The town, in particular, was Palm Beach, and in Palm Beach, Florida they had made an effort over the years to have a very competitive compensation and benefits packages for their employees – especially their public safety workers. And we focused our analysis on the public safety workers because what really happened in the town of Palm Beach was they did the switch – and it was driven a lot by people who kept on saying that moving to a 401(k) type plan would be the best way to solve the unfunded liability that came to the plan as a result of the investment downturns during the financial market collapse in 2008 and 2009.
What happened was, they put this plan in, they greatly reduced the defined benefit plan that covered their police officers and their firefighters, and they saw an exodus from the police and fire departments in a way in which they’ve never seen before. Typically, police and fire [employees] go to a town, they stay in that town, they know their community, you know, firefighters who’ve been through tough fires. You know, when another tough fire might occur, you know, maybe it’s a high-rise apartment building, they know how to fight that fire. They’ve got that experience, they can help get people out to safety and protect our property. But when we lose those experienced workers, and what happened in Palm Beach was amazing, if you look back at the years before they made the switch, once an employee was vested in that pension they didn’t leave.
In other words, they had 20-30 employees who picked up and left within the first 2 or 3 years after they offered this new plan and made it apply to everybody, both existing and future employees. So, what they’ve found was 24 police officers left who had been experienced and vested. 33 firefighters left in the next several years. And if you look back before that, they had only lost 1 fire fighter and 1 police officer.
PC: Wow. Wow.
DO: So, you really had this brain drain of experience and this was particularly there as some of those firefighters and police officers could go work for the county, they could go work for the state, they could go to another town that was still offering a defined benefit plan. There was no reason for them to stay with the town of Palm Beach. Then the other thing that happened in Palm Beach, for new employees, so here they had to go out and hire replacements for those 50 officers who left before retirement. They also lost 20 percent of their workforce to retirement because there were a number of police and firefighters who could retire, and there was no reason for them to stay. So, you know as soon as the change was done they pretty much walked away.
So they had to hire all these new employees, which they did but then what was happening was those new employees would come to Palm Beach and they would go through the police and firefighter academies. They would start to go into their rookie years and as soon as that was completed and there was another job in another town nearby they left the Palm Beach police and fire departments.
So, there was this turning of employees so in essence, where they thought they were going to save money by making this pension change. They actually ended up spending millions of dollars, probably up to $20 million or more to train the new police and firefighters that they had to hire because of the changes they made to the pensions.
PC: Go ahead, I am sorry. Please…
DO: I was just going to finish to say Palm Beach recognized that this was a mistake and within 4 years the town council – that had voted unanimously to switch to the new plan – had to turn around and unanimously switch to shut down the defined contribution plan because it had no value to retain and attract those police and firefighters.
PC: Geez. So, given that perspective and research, what are your thoughts about the talk here in Kentucky that policymakers may look at switching teachers from pensions to a 401(k) account to help address the unfunded pension liability here.
DO: Well, you know, the first thing you have to understand is that switching to a 401(k) plan in itself does absolutely nothing to address the unfunded liability that exists in the plan.
PC: That’s a great point.
DO: The switch to a DC plan probably means that future employees are going to get less in terms of benefits because the DC plan. The employee has to save more money than when it is done in a group setting, and then the other piece of that is you also don’t have those new contributions from all new employees going into the plan and working together for everyone’s benefit. It actually ends up, in some cases we’ve seen, where the switch to a defined contribution plan actually harms the funding level of the DB plan. It’s not necessarily this promise fantasy of saving something but then I think you get into what will happen with teachers and other public employees.
You know, the police and firefighters obviously are perhaps the most dramatic, as the situation in Palm Beach shows us. They actually almost had to replace more than the force that existed when they made the change. Among the teacher community, you still have individuals that are experienced teachers and you want to make sure you keep those experienced teachers in the classroom because those teachers are the ones who are the most decision and the most productive.
Studies have been shown that those experienced teachers end up having students who perform better on standardized tests that are given and they also understand the children that they have in their classroom. They’ve gone through the part of their career where they were learning and making sure that this was the career that they wanted.
They’re there, they want to teach, they know how to teach and they deliver a good education to our students, and like the police and firefighters, we don’t want to lose those experienced teachers because those experienced teachers really deliver the quality to our schools. They also help the new teachers when they come on board. If there’s no experienced teachers there to help and mentor those new teachers, we’re going to lose a lot more new teachers just like they did in Palm Beach.
PC: I would also, going the other way, when new teachers are coming in and when teachers are getting out of school and looking where they’re going to locate, I would assume that a solid pension would be a good workforce tool to recruit teachers into your state or into your community and the absence of that could hurt that recruitment and retention, correct?
DO: I think it could definitely hurt the retention, and I think on the recruitment side what a pension says to a new teacher who is coming into the classroom, it says to that teacher we want you here for your career and were willing to make the investment in you over the long term. So, we really do want you to teach our children, we want you to get good at your job. And then what we want to make sure is that we have a benefit that increases every year so that you know that, when it’s time for you to retire, I think this is especially true in a field that is still predominately women. You know, women typically as they get closer to retirement are individuals who sometimes have to leave the workforce sooner than what they might like, maybe it’s to help take care of a parent or a spouse, to help maybe with their grandkids and their own children. What the pension also does is it also assures that teacher that when he or she is getting close to retirement that they will have a plan that they can rely on and count on, and it won’t be because the plan isn’t adequate that they have to stay teaching in the classroom until, let’s say, their late 70’s.
PC: That’s a great point and Diane as Kentucky continues to debate this issue, and look at legislation on how they want to change this pension, and how they want to address this unfunded liability. Through your work can you point to any other state, an example or two where states have done a good job handling an unfunded liability.
DO: You know, you don’t have to look very far. In fact, in Eastern Kentucky you just need to look across the border into the state of West Virginia. West Virginia had a pension for their teachers that was historically never well-funded. The employee’s money, just like it goes in Kentucky, the employee money comes out of their pay, their contribution goes into the plan but quite often the state did not make its contribution into the plan that was needed to make sure those benefits would be there when the teachers got to retirement.
In the early 90’s West Virginia was persuaded to try and experiment and move the teacher plan into defined contribution accounts. They did that for 17 years, there was no real improvement in the funding in that frozen defined benefit plan that happened once they had no more teachers going into it.
What they also found at the same was that the teachers who had moved to the defined contribution plan and the new teachers couldn’t afford to retire. Most of them have account balances that wouldn’t enable them to maintain their lifestyle and so they needed to keep on teaching in the classroom.
What West Virginia was able to find was when they made a commitment to fund their teacher retirement system, they improved the funding of their teacher plan from 20%, where it was in about 2005. Today it’s almost 2/3 funded. Now they still have challenges and they still have a way to go but that’s a remarkable improvement in the funding level.
PC: It certainly is.
DO: Some of that came when the state had some, you know unexpected resources in a windfall. They made a decision to put that money into the teacher pension because they also started to understand that we have to have a good education system.
We have a lot of challenges in our economy, education is so much the cornerstone of where we’re going to see growth in our economy, and in jobs in the future, and getting a good education, getting good teachers in the classroom, all of that is paramount to having a more productive economic community.
PC: Okay! Diane Oakley, Executive Director of The National Institute on Retirement Security, I want to thank you today for your insights and perspective on this issue. Thank you so much.
DO: You’re so welcome Pat. Take care.
PC: Okay. Thank you.
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