In case you haven’t noticed, I have serious issues concerning the pensions of public employees, and their unfunded liabilities. And the bad news just keeps coming: Teachers’ $500 Billion (and Growing) Pension Problem
Today there is an almost $500 billion shortfall for funding teacher pensions, and that gap is growing. Why should you care? Because ultimately taxpayers are on the hook for that money. But the problem doesn’t just end there. The way teacher pensions operate is badly suited to today’s teacher workforce, where 30-year careers are no longer the norm. The current setup penalizes teachers who move between states, switch to private or public-charter schools that do not participate in the pension system or leave teaching altogether. Meanwhile, it becomes financial suicide for teachers to change careers after a certain point, even if they no longer want to teach or are not good at it.
But first, let’s talk about the money. Teacher pensions are part of a larger set of benefits that states and cities offer public employees, including health care and pension programs for cops, garbage men and other public employees. The Pew Center on the States puts the total shortfall for these benefits at $1 trillion. You read that right: trillion with a t. Obviously, these are important benefits to offer, but the costs are out of hand.
Although three states (New York, Florida and Washington) are currently enjoying funding surpluses for their teacher pensions, the rest have unfunded liabilities, meaning less money on hand than obligations. In New Jersey, Illinois and Connecticut, for example, these unfunded liabilities — that are just for teacher pensions — amount to more than $3,000 per state resident. Many experts see a state or city default as a real possibility in the next few years.
It would be easy to blame these shortfalls on the recent upheaval on Wall Street amid the Great Recession. But in practice, the liabilities stem from lousy incentives and bad decisions by state officials. In Pennsylvania, for instance, a 2002 surplus inspired state policymakers to increase benefits for teachers while decreasing the state’s contribution to the pension fund. It was a move that made sense politically but was horrendous fiscally — Pennsylvania’s $7 billion surplus by this year had turned into a $10 billion deficit.
Perverse incentives abound. Under traditional pensions, teachers and their state or city pay into a retirement fund that doles out a fixed amount to teachers when they retire. But only teachers who taught for 25 or 30 years reap the full benefits. (And since in some states these longtime teachers can be paid as much each year as they were making in their last few years of teaching, boomers who retire in their 50s or 60s and live for 30 more years can end up earning more from their pension than they did cumulatively during their three decades in the classroom.) Everyone else gets less, often much less than they would receive if the money were simply invested in a mutual fund. In other words, the system creates a small number of big winners at the expense of many losers.
The real losers here are the children who are facing outrageous tax increases to pay for the pensions of their teachers, grandparents, and elected officials who got us into this mess. I’m starting to think the first public pension that should get eliminated is the one we give to Congress.