By John O’Neil

Dana Dillon knew when she started teaching in 1983 that her pay would lag behind private-sector salaries.

But “one of the things that made that a little easier to swallow is an adequate retirement benefit,” says Dillon, who teaches at Weed Union Elementary School in the shadows of Mount Shasta in California. Pension checks from the California State Teachers’ Retirement System (CalSTRS) average $3,600 a month, about 65 percent of the average teacher’s compensation at retirement. That’s anything but lavish—especially considering that the state doesn’t participate in Social Security—but it is a foundation California teachers have been able to bank on.

So when California Governor Arnold Schwarzenegger declared war in January against the state’s pension funds for public employees—calling for an end to traditional “defined-benefit” (DB) pensions—the shock waves struck Dillon and other retirees with the force of a Golden State earthquake. Schwarzenegger proposed that all new public employees beginning in 2007 be forced into “defined-contribution” (DC) plans, like the 401 (k), and he vowed that if the legislature didn’t act, he’d take the issue to the voters through a November ballot initiative.

As this issue of This Active Life went to press, Schwarzenegger bowed to pressure from California ’s public employees, abandoning his support for a pension initiative this year. (More later on how they stopped the “Terminator” cold.)

But educators in a growing list of states face similar threats to their retirement security. This spring, legislators in Alaska, Georgia, Illinois, Iowa, Kansas, Maine, Maryland, New Hampshire, New Mexico, Oklahoma, and Virginia either introduced bills or are studying whether to push public employees into risky DC plans. The action in the statehouses comes as President Bush travels the country pressing his plan for privatizing Social Security, which would punch holes in the venerable safety net that ensures a modicum of retirement security for millions of Americans.

“We’re seeing a full-frontal assault on secure defined-benefit pensions—whether it’s Social Security or your state pension fund,” says Lily Eskelsen, NEA secretary-treasurer and a former trustee of the Utah state pension fund.

A ‘Trojan Horse’ Threat

What’s going on? Facing tight budgets and an aging population, legislators who’ve linked arms with free-market ideologues are offering up a Trojan Horse. Using terms like “pension reform” and “pension modernization,” they’re trying to sell a switch to defined-contribution plans as a way to reduce the state’s obligations while giving employees “ownership” of their retirement plans.

But what’s inside this Trojan Horse should concern you. Converting to DC plans puts the retirement security of both Active and Retired education employees at risk, because such a change would mean:

• Reduced benefits for Active employees. By forcing new  education employees to make their own investments—and bear the risk—DC plans undermine the security that teachers have counted on in their pension system. “It’s a bad deal, because it takes a guaranteed benefit and makes it into an iffy proposition,” says Dillon, a pre-retired member of the California Teachers Association-Retired and CalSTRS trustee. “Take a look at the debacles of Enron and WorldCom. People lost their retirement accounts totally.”

While you can never be sure how much money you’d be able to draw out of a 401 (k), defined-benefit plans offer a predictable monthly payment. Traditional pension plans offer other advantages, including annual cost-of-living adjustments (COLAs) and survivor and disability benefits. If new employees are forced to enroll in a DC plan, it will become even harder to recruit and retain new teachers, predicts Arlene Pavey, president of CTA-Retired.

• Tough sledding for state retirement plans—and for those drawing a pension. Although it may appear that converting to 401 (k)-style plans affects only those still in the classroom, that’s not the case. Retirement systems depend on contributions from active employees to continue making long-term investments and paying benefits to retirees. “If the money doesn’t come in, the system melts down,” says Pavey. Although states must continue to honor guaranteed pensions to retirees, some benefits that fluctuate, such as COLAs, could be cut.
• Higher costs. States are unlikely to save money by converting to a DC plan because DB plans are thriftier. According to research by the California Public Employees’ Retirement System (CalPERS), the nation’s largest, the cost to administer a DB plan is about 18 cents per $100 invested, versus $1.35 to administer a DC plan. Indeed, even as legislators explore the DC option, the evidence that employees do better under DB plans continues to mount.

Nebraska offers a textbook case for the advantages of traditional pension plans, says Roger Rea, a former teacher in Omaha. The Nebraska Public Employees’ Retirement Systems (NPERS) operates separate defined-benefit plans covering teachers, state patrol workers, and judges. NPERS also runs a defined-contribution plan for state employees and another for county employees.

A study that compared returns for the NPERS plans found that between 1983 and 1999, the DB plans yielded an average of 11 percent per year, compared with 6 percent for those participating in the DC plans. The result? The DB plans offered their participants income replacement averaging 60 to 70 percent. The state and county workers in the DC plans, however, got a benefit of only about 25 to 30 percent income replacement. “The defined-contribution plan just does not provide the returns they need to get the benefits they require,” says Rea. Informed by such dramatic results, Nebraska in 2003 offered its state and county workers a defined-benefit plan and allowed workers presently languishing in the DC plan to switch over.

Arkansas educators aren’t yet facing the prospect of being switched over to DC plans—and retired teacher Hazel Coleman, who has served as a trustee of the Arkansas Teacher Retirement System since 1997, would like to keep it that way. Coleman is as well versed with the complexities of pensions and investing as anyone. Yet she admits that, “when I was young, I simply didn’t think about what I needed for when I retired.” But the state retirement plan was looking out for her, making sure she and her employer made mandatory contributions, investing the money on behalf of all participants, and—most important—providing a buffer against the risk of investing by guaranteeing the benefits that Coleman and her fellow pensioners receive. Her pension also includes a guaranteed COLA of at least 3 percent each year. She lives comfortably—certainly not extravagantly—and has the funds to do some traveling and enjoy her favorite hobby, reading. 

When she was still teaching, “It was always valuable to know how much I would get each month in retirement,” says Coleman. “If you invest money in a 401 (k) you may not pick the right investments to make. And if they go under, you go under.”

A Victory in California

That’s one of the arguments California activists used to counter Schwarzenegger’s plan to gut the public pension systems. And in just 10 weeks, public employees, including a healthy contingent of Active and Retired members, forced the governor to back down. Their lessons could prove valuable when a DC plan is proposed for your state:

• Get the word out. Schwarzenegger made headlines coast-to-coast by declaring war on pensions, but opponents countered with the facts. Both CalSTRS and CalPERS promoted fact sheets showing the superiority of DB systems; some of these found their way into Letters to the Editor of newspapers. CTA aired radio ads countering Schwarzenegger’s proposals (which also included a flip-flop on education funding and a merit pay proposal for teachers), and CTA-Retired devoted most of its February newsletter to the implications of his pension changes.
• Lobby the decisionmakers. Beverly Carlson, secretary-treasurer of CTA-Retired, sent talking points and model letters to CTA-Retired members, urging them to lobby their representatives. “We got a fantastic response,” even drawing letters from retirees who’d moved out of state, she says. Carlson herself testified against a bill in the state legislature to end DB plans for public employees; that bill never made it out of committee.
• Find partners —and make noise. CTA was part of a coalition that included school board and administrator groups as well as unions representing firefighters, police, and nurses. They kept the pension issue in the forefront by protesting Schwarzenegger’s public appearances. “Everywhere he went, there was a group that was picketing him and booing him as he entered,” says Karen Russell, a retired teacher and former CalSTRS trustee.

At one appearance in Anaheim, local organizing paid off when 200 protesters showed up on 24 hours’ notice to picket Schwarzenegger and challenge those collecting signatures to put the pension proposal on the state ballot, Russell reports. At a Schwarzenegger fund-raiser in San Francisco, more than 4,000 teachers and other public workers picketed the event. The public couldn’t help but notice. “Every time a cable car went by, they could see what was going on,” says Dennis Kelly, president of United Educators of San Francisco. In the end, “You can’t discount the importance of going to the mat and putting the pressure on” says Russell.

A bruised Schwarzenegger has vowed to revisit the initiative in 2006. So NEA-Retired activists in California —and elsewhere—aren’t getting complacent.

Vermont  retiree Jay Kaplan, a trustee of the Vermont State Teachers Retirement System, chose another route to oppose those pushing the privatization of pension plans. Kaplan convinced his fellow trustees to pass a resolution putting investment firms on notice that the trustees will “carefully consider” whether investment companies wishing to do business with the retirement system support privatizing Social Security. Vermont was the first state to pass such a resolution. “We didn’t want to reward corporations that were working against the best interest of our plan members,” he explains.

Now’s the time to make your voice heard on the importance of pension security, adds Nebraska member John Jensen, former president of the National Council on Teacher Retirement. “The next six months will be crucial. If we can’t step up and stop it right now, it will be doubly hard next year. And if we lose guaranteed retirement benefits, it will be nearly impossible to get them back.”

Traditional Pensions Win Out

Why are defined-benefit (DB) plans worth fighting for? Just compare the benefits of DB plans to the risks of defined-contribution (DC) plans being proposed for public employees.

DB Plans

• Monthly pension amount is guaranteed for as long as you live
• Employer bears the investment risk
• Investment expenses kept low, because your money is combined with other plan members
• Feature early retirement option
• Typically include annual cost-of-living adjustment from pension plan provider
• Provide a minimum death benefit and disability features

DC Plans

• No guarantee of monthly allowance—and you could outlive your savings
• You’ll bear the risk if your investments do poorly
• Investment expenses are high, eating into your portfolio’s return
• You can retire early…but will your retirement account run out?
• No COLAs—the lump sum amount in your retirement is all you’ll have to draw on
• No minimum death benefit or protection against disability