Outside Group Threatens Teacher Retirement Plan

Would Replace Defined Benefit Plan with Weaker Defined Contribution Plan

 By Roger Rea, President

The elections may be over, but the fight to keep our defined benefit retirement plan is just beginning.  An obscure group known as the Retirement Security Initiative, RSI, has hired one of the premier lobbying firms in Lincoln to try to abolish defined benefit retirement plans for public employees.  While new to Nebraska, RSI has a fairly long and storied track record attacking public employee retirement plans across the nation.  Headed by Chuck Reed, the former mayor of San Jose, CA, RSI has helped launch attacks on public pensions in Illinois, Kentucky, Alabama and Pennsylvania. 

Reed started with a failed attempt to destroy public pensions in San Jose when he was mayor there.  He pushed for changes in the retirement systems for public employees, in an attempt to cut costs, but in reality, the changes gutted the retirement security for all public employees in San Jose.  The changes he rammed through were challenged in court.  The courts ruled that the changes were unconstitutional and overturned every change that Reed attempted to make.  Reed apparently did not learn the lesson about the changes he wanted in pensions, and tried twice more to get other California cities to enact similar, unconstitutional changes in retirement plans.  After failing at those attempts, Reed helped form the Retirement Security Initiative (RSI) to advance the same failed ideas in other states.  He recently came to Lincoln, NE to promote his ideas to the Lincoln Police and Fire Pension Committee.

Defined benefit pensions are a form of deferred compensation that employees earn over the course of their career. When public employees (including teachers) sign an employment contract, in addition to their salary and other benefits, part of their compensation is earning a defined benefit pension. These employees contribute a portion of every paycheck toward their pension. Since pension benefits are a contractual right and something to which employees contribute, they are also considered a “vested” right. In addition to the court ruling in San Jose, courts in Illinois, Oregon, and elsewhere have struck down pension-gutting laws for violating constitutionally protected rights.

RSI claims to offer information to public policy makers to help them learn about pension issues and explore policy options.  Nothing can be further from the truth.  Much of the money behind RSI comes from the Arnold Foundation.  The Arnold Foundation was started by John Arnold, a former Enron employee.  Arnold left Enron, taking with him an $8 million bonus, just before the company collapsed into bankruptcy.  Subsequently, he started a hedge fund and is now a billionaire.  His foundation now funds and produces bogus research on retirement systems with the goal of replacing defined benefit plans with ones that closely resemble 401(k)s, leaving retirees little that they can count on for retirement security. 

The National Institute on Retirement Security, NIRS, does independent research on retirement plans.  A recent publication, “Still a Better Bang for the Buck,” compares how much it costs to provide a given level of retirement income through a defined benefit retirement plan (similar to our school employee retirement plan) and a traditional defined contribution, or DC plan (similar to a 401(k) plan).  The report concludes that a defined benefit, or DB plan, delivers the retirement benefit at a cost that is 48% lower than what DC or a 401(k) plan would cost.  There are three main drivers that account for the lower cost for the DB plan.

  1. Pooling the longevity risk.  To put this in different words, a DB plan only needs to set aside enough money to cover the average life expectancy of a large group of people.  To be sure that the retiree does not run out of money, an individual with a DC plan must set aside more money to guard against the possibility that they will be among the half of retirees who will live longer than the average life expectancy.  DB longevity risk pooling generates a 10% cost savings.
  2. DB plans are “ageless,” and therefore can perpetually maintain an optimally invested portfolio. In contrast, an individual investor with a DC plan must lower the risk of the investment portfolio as he/she gets close to retirement age to ensure that there will be a steady source of cash to fund retirement.  The lower risk portfolio will have more cash and bonds, sacrificing the higher returns associated with stocks.  This DB balanced portfolio generates an 11% cost savings.
  3. DB plans have higher returns than individual investors with DC plans because they have lower fees and professional management of the money.  The lower fees and higher returns of DB plans generate a 27% cost savings.

At this time we do not know how, or if, the Retirement Security Initiative (RSI) will attempt to impact our retirement plans.  But we do know that RSI is a wolf in sheep’s clothing.  All of us will need to be watchful in the coming legislative session.  If the need arises, we will to be ready to act on short notice to defend our retirement plans against attack.