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Christian Weller, PhD, professor of public policy at the McCormick Graduate School of Policy and Global Solutions at The University of Massachusetts in Boston
Pat Crowley: Hello, I am Patrick Crowley with the Kentucky Retired Teachers Association. Today we are joined by Christian Weller. He’s a professor of public policy at the McCormick Graduate School of Policy and Global Solutions at The University of Massachusetts in Boston.
He’s also written extensively on public pensions through his book, Retirement On The Rocks and also through a report for the National Institute On Retirement Security, Win, Win Pensions Efficiently Serve Americans, Schools and Teachers. Professor Weller, thank you for joining us today.
Professor Christian Weller: Well, thank you very much for having me Patrick.
PC: Okay Christian, let me ask you, So we are in Kentucky, where we have a very serious pension system, public pension system with teachers, but Kentucky certainly not alone many states are this situation. How did we get here?
CW: Well, the answer is typically pretty simple and people tend to overlook it. The answer is that the employers, typically the state, did not contribute as much to the pensions as they should have. They didn’t live up to the promises. What people forget is that typically in a pension, and I think that’s true for Kentucky as well as for many other states. When you have a pension for public sector employees, there is contribution from the employees, from the teachers, from the bus drivers, from the police and the firefighters, and from everybody else into their pension systems. That is mandatory and that is fixed and you can’t get away from that.
There’s also supposed to be a contribution from the employer side and in the late 1990’s and early 2000’s employers often sort of played shenanigans, made some assumptions that the stock market will keep on going forever or stuff like that and did not contribute and did not live up to the promises they had made to their employees.
At some point, there was the realization that we had serious market drops in 2001 and then again in 2009. That some of the sort of lofty assumptions that people had made on the employer side wouldn’t come to reality and the problem really was that this was foreseeable, people warned the employers about it and the employers ignored them.
This is misrepresented as something that the employer, employee representatives that employees want and that’s not true. As I said the employees made their contributions in almost all cases. They have no alternative they have to do that, but it is the employers that did not live up to the bargain, did not fulfill the promises of making their employees whole and now we’re in the situation where many pension funds are underfunded. In some instances, there have to be adjustments made. Unfortunately, the politics often are such that the culprit is being sought among employees rather than among employers, who could raise taxes or something else and finally live up to their responsibilities that they made.
PC: Yes, you very accurately summed up the situation here in Kentucky, professor Weller. Who I should also mention is a senior fellow at the Center for American Progress. So professor what we’re seeing in Kentucky, and I’m sure it’s other places as well, from what I could read in your research, there seems to be a rush now by the policy makers, by the elected officials towards these 401 type K plans but you’re concerned about those. Talk a little bit about your concerns about why the defined contribution versus the defined benefit.
CW: I should say that I’m not completely opposed to the idea of the 401(k) or 403(b) plan that would be in the public sector. That is a nice little add on, but it shouldn’t be the primary retirement tool. Retirement plans, the typical defined benefit pension that you find in the public sector, it’s been around since before the country was created, is they’ve been around since 1775 for a very good reason.
These public pensions allow the public sector in the early days of the country – allowed George Washington to attract highly skilled officers who were willing to fight for the independence of the country. Now that’s an extreme situation, but the pension is meant to attract skilled and dedicated workers be that police and firefighters, be that teachers, be that bus drivers those are sort of the big professional groups in the public sector.
They dedicate their skills and their dedication to the public sector because what the pension does is it sort of says, okay, well you come work for me, it signals to the employee, you come and work for the public sector, you bring your enthusiasm, your dedication to public service here and we’ll reward you after 20-30 years with a middle-class retirement stability.
That’s always been the case with the public pension. If you took a defined benefit pension away and you replace it with a 401(k) you are losing that tool. There is nothing you can do in a 401(k) plan that you know you worked for me for 30 years and then I reward you for your longevity because that’s not how 401(k) plans work.
I should also say like many of the critics of defined benefit pensions will often say like, well, in the private sector they have gone away and look at the technology industry, the IT industry and Silicon Valley, in a knowledge economy, they all have a 401(k), that’s not quite accurate because they have exactly that problem that I described. We need to attract highly skilled, very well-educated people to our industry and the way they do it is through stock options, which is sort of like, okay, well you work for five years and you will get a stock option. The problem is you can’t issue stock options in a school district and if you can’t do that the only other way you can do that is through a defined benefit pension.
So again, we shouldn’t be misled by a silly argument that has no foundation. In fact, the reason why defined benefit pension exist – one reason – is that they help employers to attract and retain very dedicated skilled people that the industry needs. You got to remember the public-sector workforce has higher education requirements because who are the public-sector workers, well, they tend to be teachers. They tend to be police and firefighters and people with lots and lots of training who you want to be sure are going to be around to use that skill for many years and the only way to make sure you recruit the team, that kind of workforce is through defined benefit pension in the public sector.
PC: That is tremendous perspectives and actually want to expand on that point. In your report, The National Institute On Retirement Security, Win, Win Pensions Efficiently Serve Americans, Schools and Teachers. Students as well. What you’re saying here is if we want good schools, we need good teachers. If we want good teachers, then we better have a good benefit plan to not only recruit teachers but to keep the good ones to make sure they don’t flee for other states or even other professions.
CW: That’s correct, and the latest evidence suggests that teachers takes a while, it takes about five years or so for teachers to become really comfortable and good and experienced in their job and that teachers would get better at their job on average for 30 to 40 years. You want to get the most out of teachers by keeping them on the job as long as possible. You’re losing talent if you have a 401(k) and the turnover goes up by 20 or 30 percent. Then all the sudden you are constantly replacing the experienced teachers with unexperienced teachers.
That doesn’t mean that the new-comers aren’t good and won’t be good at some point they just never get the chance to become good because after five or six years with the 401(k) plan, they’re like, yeah, I’m going to do something else because there is no mold or incentive to stick around. In fact, I don’t want to go into detail, but there might be a penalty of sticking around too long because at some point you’re getting too many deals and too good at being a teacher, which means you’re not going to be too good at being a stock broker and at some point you have to make that decision and that decision is becoming easier to switch jobs if there’s nothing holding you in that job like a defined benefit pension.
PC: I want to get back to something you said earlier too, about how we got to this problem and the lack of proper funding. In Kentucky, we’ve had the legislature over the last decade be resistant to bringing in new kinds of revenue.
Comprehensive tax reform, which I have heard say could bring more revenue in. Other areas that have popped up are casino gaming and medical marijuana. Of course, there are those who say we can’t gamble or smoke our way out of this problem, or use medical marijuana out of this problem, but do you find other states maybe doing this well are looking at new sources of revenue and is that something that the policymakers need to be absolutely looking at is they try to tackle this problem across the country?
CW: Well, for one of the perspective, I think my argument is that, well, yes employers should be looking at additional sources of revenue. In order to tackle the underfunding problem. I’m honestly – I do not know right off the top of my head, which states have used dedicated resources. I think some states have sort of put more money into – Massachusetts and others have in part of comprehensive package put more money in from general revenue – but that’s part of an overall package. In many cases, more revenue has been the additional contributions from the employees’ side, unfortunately.
Let me go back to the original argument, that is employers did not meet the necessary contributions. They did not increase, did not uphold their end of the bargain to contribute to the pensions. That means that they could keep taxes lower than they otherwise would have, they could have in some cases cut taxes rather than funding the pension. The problem is that you’re like politically the problem is that you’re sort of making the promises, I’m going to pay this pension 20 years from now, but New Jersey is sort of an extreme example because they’ve came from a really bad team about 20 years ago with their pension system, to really mask over the fact that the employers were not making the contributions that they had promised essentially through the system.
But I know this is an unpopular view but at some point you have say okay we have had the past employers, the past governors and past legislators sort of lie essentially to the population about the true level of taxes necessary, to fund the obligations that the legislature needs. The only way to square that circle is to find additional revenue without raising contributions from the employees, who have already been forced to meet their share of the contributions throughout that entire period.
PC: Right, Professor Weller is there anything else you’d like to say?
CW: No, I think the important part is pensions do not exist just to be helpful to the employer. They’re also meant to really, and the data shows that, they’re really meant to be a pathway to real middle-class retirement security. And if we’re concerned about real middle-class retirement security, you should fight tooth and nail about keeping every single pension that we have because they’re the only proven way of getting there.
PC: Okay. Christian Weller, Professor of Public Policy at the McCormick Graduate School of Policy and Global Solutions at The University of Massachusetts. He’s the author of Retirement, On The Rocks. Thank you for joining us today.
CW: Thank you very much for having me.
PC: All right buddy. Have a good day. Thank you.
CW: You too. Have a good day. Bye. Bye.