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Do Teachers And Public Workers Without Social Security Lose Out? A New Analysis Says, ‘Sometimes’

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Conventional wisdom says that the reason for public sector pension plans’ poor track record on funding levels is that benefit levels are simply too high, causing politicians to kick the can down the road perpetually. In Illinois, for example, “Tier 1” teachers can retire at any age, after 35 years of service, without any reduction to their benefit, and receive 75% of their pay with automatic 3% increases each year. As a bonus, they can add to their service calculation two years of unused sick leave, as well as non-vested time spent teaching out-of-state, if they pay the employee contribution (but not the employer cost) for that service. You simply can’t beat that in the private sector, even considering Social Security benefits.

But that’s not always true. Illinois is one of 15 states which do not cover some or all of their employees in Social Security. Although these plans ought to provide benefits that are the equivalent of the combination of Social Security and a private-sector retirement plan, federal law requires that, at a minimum, they must provide benefits at least as good as those provided by Social Security, and has established a “Safe Harbor” formula that determines whether plans comply with these rules: if a plan pays a benefit of at least 1.5% of pay, averaged over the last three years of service, and beginning no later than Social Security retirement age, then the plan is considered “qualified” and the state/town/school district can opt out of Social Security.

This is a very narrow test, though, and individual teachers in those plans can end up losing out. The test allows states to establish vesting periods, in some cases in excess of what federal law permits for private sector plans, such as 10 years in Connecticut, Georgia, Illinois, and Massachusetts. (Strictly speaking, Social Security has a sort of “vesting” in its coverage requirements, but those are met by work history over multiple employers.) The test doesn’t question whether the benefits provide by the plan exceed the contributions required from the employees. It doesn’t take into account teachers who withdraw their contributions and lose their benefits. And it doesn’t require a cost-of-living adjustment, without which fixed-income pensions will lose ground relative to Social Security even if benefits are equal at retirement.

At the same time, some workers in these plans will get a full Social Security benefit even if they leave their public sector job before earning a vested benefit, or if their benefit is so low they take their refund of contributions instead, simply because they will have met their 35 years of Social Security earnings history required for a full benefit, and because Windfall Elimination Provisions don’t apply for retirees who worked for public sector employers if they don’t actually have public sector pensions. That’s not to say there are positives to the failings in public sector plan design, but that Social Security itself mitigates those failings.

It is with this in mind that the Center for Retirement Research published a brief in April summarizing its authors’ research on the question of how workers in these plans fare, overall, taking into account all of those systems’ workers, not merely those with careers long enough to benefit from the systems’ generosity for full-career employees. They used a set of assumptions to calculate workers’ lifetime pension wealth, and a counterfactual Social Security wealth, to calculate, across all employees in a system and their likelihood to make it to retirement, and based on the benefits available for newly hired employees (taking into account, that is, reductions for new tiers), the “wealth ratio” for a given plan. And, in fact, nearly half of those plans, or 43%, did not have benefits that were as good as Social Security, on average for all workers, using this more sophisticated analysis.

To be clear, that’s the percentage of plans; the authors did not provide an analysis of what percentage of workers ended up with lower-than-Social Security lifetime benefits. They did, however, perform their analysis for certain sample workers, finding that in 74% of plans, a low earner would be better off with Social Security.

And the authors did not provide a listing of which of the plans in their study were relatively more or less generous, nor whether more generous plans were more or less funded than the parsimonious ones, nor — considering that they evaluated only new hires’ benefits — whether those which are low, are low because those are plans which had historically been low, or reflect new benefit cuts in response to low funding ratios.

But even with those limitations, this study is an important data point, especially for those of us, including, yes, myself, who believe that a key piece of Social Security, and public pension, reform is for all Americans to participate in our national old-age social insurance system.

And if you ask yourself, “how can benefit plans which are so expensive that politicians can’t fund them properly, have such poor results in this analysis?” that demonstrates, in part, the extent of the inequality between some workers and others, that you get with these sorts of plans.


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