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Changing Paradigm for Pensions
By Kevin Hart, NYSUT.org
January 19, 2006
Math scholars surround Michael Moffre of the Maplewood Teachers Association.
The rhetoric is heating up, and NYSUT is determined to protect your benefits
If you have any doubt that the private pension system in the United States is collapsing, walk a day in Margaret Bartolotti's shoes.
Bartolotti, a retired teacher from the Webster Teachers Association, near Rochester , had her world jarred when General Motors supplier Delphi Corp. filed for Chapter 11 bankruptcy last year. Her husband, Frank, is a 27-year employee of Delphi , which has reportedly underfunded its pension plan by nearly $11 billion and may look to stop paying pensions. Frank Bartolotti cannot retire for another three years and wonders whether his pension will be there.
"The regular employees like my husband didn't design the cars and they didn't make the boardroom decisions," Bartolotti said. "When these people work for 30 or 40 years and have to worry about their retirement, something isn't right."
Fortunately, Bartolotti said, she and her husband can rely on her pension from three decades of public school teaching. But now even public pensions are under fire.
In the past year, right-wing think tanks have published many justifications for slashing costs by replacing "defined benefit" pension systems for educators with private savings plans that would have little or no employer contributions. In New York , the calls for drastic change have come even as administrators of the pension plans for public school employees say the plans are in excellent financial shape.
Pension experts and union leaders believe much of the debate about New York teacher and SRP pensions is simply rhetoric fueled by private-account proponents looking to eliminate pensions as part of a larger political agenda.
"It's shameful that some people would use the collapse of private pensions to justify action against public pensions," said New York State United Teachers President Dick Iannuzzi. "The problem with pensions in this country is not that public employees have them. The problem is that a secure retirement is a vanishing dream."
The pension plans that now cover most of New York 's public school employees are listed in the box at left. Administrators say years of financial discipline have left them well-prepared to meet present and future obligations.
Education experts point out that pensions are an important recruiting tool for New York schools, which are facing significant teacher shortages. Scrapping pensions could cause long-term recruiting and retention problems and lead to more immediate disasters in small districts and math and science classrooms, where teachers are in especially short supply.
Feeling the pinch
Experts say women, small school districts, and math and science classrooms would suffer most if pensions for teachers and SRPs were scrapped. Women often struggle in retirement. First, they live longer than men - five years longer, on average, according to the Centers for Disease Control. This can put women at a greater risk of having their 403(b) and 401(k) accounts run out of money.
According to the Older Women's League, an advocacy group, women are twice as likely as men to retire in poverty. Because they are the primary caregivers of America 's children, they face career interruptions that curtail retirement savings.
"Private retirement systems fail many female retirees," Iannuzzi said. "As an organization that represents hundreds of thousands of female members, we consider the pension system a must for ensuring these members retire with dignity."
Removing the pension system also could lead to a recruiting disaster for small schools with tighter budgets. After all, if teachers were dependent on nothing but individual retirement plans, they might have to teach wherever they could make the most money. Michael Moffre, a middle-level math teacher in Maplewood , said his small, high-performing district in Albany County would suffer.
"I could make a lateral move and make $10,000 more a year, and without a pension, I'd have to make that move," said Moffre, a member of the Maplewood TA. "But then who is going to teach these kids?"
Smaller districts often pay SRPs lower wages as well, and removing pensions will make attracting these workers considerably more difficult. The end result: less-clean schools, transportation problems and back-office headaches in districts that are already asked to do more with less.
Fallout from eliminating public pensions would be felt quickly in math and science classrooms, where many teachers can make considerably better wages in the private sector. Mike Vaccariello, a science Ph.D., turned down a potentially lucrative career in pharmaceuticals to teach science research on Long Island .
Although having a pension was not the primary reason Vaccariello entered teaching, it was a definite perk and helped him feel better about shunning the big bucks in the private sector.
"Eliminating pensions would be frightful," said Vaccariello of the Sachem Central TA. "There has to be a benefit if you are going to ask people to make less."
Breaking a promise
In 1974, Congress enacted the Employee Retirement Income Security Act to ensure that employers adequately funded and ethically administered their pension plans. In private industry, ethically administered pension plans have become more the exception than the rule. In recent years, several multi-billion-dollar corporations have scrapped pension systems or filed bankruptcy to avoid paying them, refusing to meet obligations to retired and active workers.
The Pension Benefit Guaranty Corp., established by ERISA to insure the nation's pension plans, estimates the number of pension plans offered by American corporations declined more than 80 percent in the past 20 years. In the past 10 years, PBGC has gone from insuring 55,000 private pension plans to roughly 30,000.
Early this month, IBM announced it would freeze pension benefits for its American employees starting in 2008 and offer them only a 401(k) retirement plan in the future. This move would affect 117,000 employees.
Other companies have used ERISA loopholes to underfund pension plans, file for bankruptcy, dump pension obligations on PBGC and emerge from bankruptcy in better financial shape. Meanwhile, because of limits on PBGC payouts, some workers receive less than half of what had been promised.
Why is this happening now? Many pension plans performed well with very little funding in the 1990s, while the stock market climbed to record levels. But the market has cooled, baby boomers are retiring and many companies simply are refusing to shoulder the cost of honoring their pension commitments.
Private and public pension plans in the United States are underfunded by $450 billion, according to the estimate of the Cato Institute, a conservative policy group in Washington . PBGC went from a surplus five years ago to running a $23 billion deficit at the end of last year, the agency reported, as it continues to be slammed with pension-shedding bankruptcies by major employers such as Huffy Corp., United Airlines and US Airways.
One of the dirty secrets that many companies share, however, is that top executive pensions often are protected during bankruptcy in a way that rank-and-file employee pensions are not.
A report by U.S. Rep. George Miller of California found that United Airlines and US Airways paid millions to their executive pension plans just months before filing for bankruptcy.
"Often the very managers that run companies into bankruptcy and default on worker pensions exit their companies financially secure for life," said Iannuzzi. "Where are the special interest groups on this issue? Why aren't they asking these executives to give up their million-dollar pensions?"
Public pensions strong
Like private-industry counterparts, managers of public pensions were able to yield significant returns on investments during the stock market boom. As the market leveled and managers continued to contribute at record-low levels, deficits began to develop.
Pensions in some states are facing billion-dollar funding gaps. In 2005, Alaska Gov. Frank Murkowski signed a bill scrapping state pensions for new teachers after the state inadequately funded the system. Last month's transit strike in New York City was worsened by an admitted miscalculation by the chairman of the Metropolitan Transportation Authority that the Transit Workers Union would agree to pension slashing, according to the New York Times.
Critics are quick to declare the era of public pensions over, while ignoring that the problems were self-inflicted and that, by contrast, New York 's pension systems have been models of financial discipline.
The state Teachers' Retirement System faced criticism this year after informing school districts that their employer contribution rate would increase from 8.5 percent to 9.5 percent in 2006-07, although critics often neglected to mention that the 10-year average contribution is only 2.5 percent (see chart).
"Many districts were paying almost nothing in the 1990s and were paying, on average, more than 20 percent in the 1980s," Iannuzzi said. "To suggest that we're somehow nearing record contribution levels is irresponsible."
Sheila Salenger, one of three teacher-members on the NYSTRS board, points out that the system is well-prepared to provide financial security. "TRS is solvent, is meeting its obligations and is funded appropriately," she said. "It has grown at record percentages during a weak stock market."
The ERS, the pension system for education support personnel, also is performing well, said state Comptroller Alan G. Hevesi, who oversees the fund.
"The New York State Common Retirement Fund is fully funded and completely secure in its ability to meet its obligations to our 982,000 members," he said. "In contrast to other systems that are nearing insolvency, we have fought to ensure that the state did not enact irresponsible proposals to underfund the system that would have endangered the fund and cost taxpayers even more in the future."
Advocates of a so-called 'ownership society' in America have attempted to place a positive spin on the difficulties of many traditional defined-benefit pension systems in order to promote private 401(k) and 403(b) plans. These defined-contribution plans are controlled by the individual, who can invest in stocks, bonds, annuities and other investments, perhaps with a percentage matched by employers.
Supporters claim the money is safer because it is inheritable and can't be touched by the government. But according to a report by Time magazine, these plans are troubling as replacements for traditional pensions.
In October, Time reported that half of the active 401(k) accounts in America have less than $17,900 - one in four has less than $5,000.
Unlike pensions, 401(k) and 403(b) plans provide no guarantees that you won't spend your retirement in poverty.
In addition, the stock market can be volatile. Many workers - public and private - had their retirements put on hold as a result of the bear market that followed 9/11 and the collapse of the dot.com bubble.
"There is plenty of rhetoric trying to convince American workers that 401(k) and 403(b) plans can provide as much stability as a pension," said NYSUT Executive Vice President Alan Lubin. "These plans are supplements to a sound pension plan, not replacements. When President Bush attempted to privatize Social Security and turn it into an enormous 401(k) plan, American workers turned out in force to reject his proposal. We don't need any more politics being played with Americans' retirement security."
Pensions vs. pay
Critics who advocate scrapping pensions for public employees often ignore that these pensions historically have been used to justify keeping wages for educators artificially low.
"The majority of people who go into teaching are trading high salaries for security," Salenger said. "Most teachers are aware that they are making less than they would in the private sector."
Education Week's research report Quality Counts 2000 found that teachers between the ages of 44 and 50 earn more than $32,000 a year less than private-sector counterparts with master's degrees. That's nearly a quarter of a million dollars in lost salary in just seven years, so it's evident that teachers with master's degrees are giving up between $500,000 and $1 million over a 30-year career.
And though critics argue that New York teachers tend to make more than their counterparts in other states, it does not offset the higher cost of living. For example, a study by the American Federation of Teachers, NYSUT's national affiliate, shows that in 2003-04, the average salary paid to New York teachers was the third-highest in the country, although New York is barely above several other states.
Those figures are consistent with a study by the University of Kentucky's Center for Business and Economic Research in the late 1990s, which found that New York state has the fifth-highest per capita income in the country - but when you adjust based on what that money actually buys, New York slips into the bottom half.
The purchasing power of the typical New Yorker is average at best, and the situation is worse for public school employees who are earning lower wages. According to a report by the National Center for Education Statistics, low salary remains one of the top five reasons teachers leave the profession.
"At the bargaining table, the promise of a guaranteed pension has often been used by school districts to encourage public school employees to accept lower wages," said Iannuzzi, who served as a local president in Central Islip on Long Island for eight years before taking a leadership role at NYSUT.
Bad timing
Removing pensions is not just a bad idea - historically, it couldn't come at a worse time.
According to a 2005 study by the National Center for Education Statistics, nearly 30 percent of K-12 teachers in the United States are age 50 or over, meaning the next 10 years should usher in an unprecedented number of retirements.
"This is an awful time to even debate policies that would damage teacher recruitment," Lubin said. "If anything, this is a time to start researching inducements to encourage more people to consider teaching. We are going to need these people - and in large numbers."
Iannuzzi said the debate over public pension systems is yet another reason American workers need labor unions more than ever.
"The labor movement is the last organized resistance in America to the corporate greed that is robbing American workers," said Iannuzzi. "These critics of public pensions don't really believe that we can improve teacher recruitment and education quality while underpaying public school employees and removing benefits. The goal here is to cut costs, no matter who is hurt in the process."
Fortunately, New York is the only state in the country that has a clause in the state constitution that keeps pensions from being reduced once implemented. They are, in theory, safeguarded from some of the abuses that have become rampant in the private sector.
One word
"We're protected by one word: not," NYSUT activist Sheila Goldberg told a retiree council meeting on Long Island in November. "Right now, the state 'shall not' reduce state pensions once offered. You take out that one word and our protections are gone."
NYSUT has aggressively lobbied against a state constitutional convention, a closed-door affair at which unfavorable changes can be quickly and quietly made.
Salenger believes much retirement panic has been caused by a "hysterical overreaction" to the onset of baby boom retirements. Suzanne Paul, executive director of the Global Action on Aging, a group that consults with the United Nations, pointed out that baby boomers will move out of the retirement system over the next 30 years, and will be replaced by a 'birth dearth' that followed their generation.
"Whether you have 1 million or 100 million people in a retirement system, a pension ought to be a right for all retired Americans," Iannuzzi said. " America 's retirement pool today consists of men and women who sacrificed much to help grow our nation. It is disgraceful that some people want to treat our retirees as a financial burden."
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