Spotlight

January 2005

Pensions 101

Let's open today's class with a pop quiz. Your pension plan is:

1. A defined-benefit plan
2. A 401 (k)…or is it a 403 (b)?
3. In a file folder…hold on a sec, I'm sure it's around here somewhere.
4. I have a pension plan?

We understand. Between chasing kids all day and then putting out fires on the home front, few of us have the time—or the expertise—to delve into the nuances of our pension plans.

But it's a mistake to ignore this vital piece of your compensation. In fact, with more than a few legislators around the country aiming to chip away at public employees' retirement plans, a little information might prepare us to guard against encroachments.

So today's class features two simple lessons brought to you by NEA members who serve on state pension boards, poring over spreadsheets and quizzing pinstriped financial types on your behalf. (And, can we ever thank them enough?)

Lesson number one: The pension plans held by the vast majority of teachers and education support professionals are rock-solid and will provide a guaranteed stream of income every month during retirement.

In pension-speak, these are defined-benefit (DB) plans, so named because the benefit you'll eventually get can be calculated, or defined, before you retire. State plans differ, but most base your pension on the number of years you work, your earnings, and your age at retirement. You crunch the numbers and calculate that your pension will bring in, say, $2,200 a month—for life. Most also offer joint survivor benefits and annual cost-of-living adjustments to guard against inflation.

"With a defined-benefit plan, you'll know exactly how much you're getting," says retired teacher Richard Lansford, a trustee of the Colorado Public Employees' Retirement Association. "If you live to be 95, as my father did, you can't outlive it. It gives you security."

That sense of security is conspicuously lacking from the second type of pension, known as defined-contribution (DC) plans. Heavily used in the private sector, plans such as the 401 (k) define how much the employer and employee pay into the retirement account. But the amount eventually available during retirement depends on how well the employee invests the money—a risky proposition. When the stock bubble burst in 2000, you may recall, many workers with DC plans found their nest eggs decimated, forcing them to delay retirement or rejoin the work force.

Which brings us to…

Lesson number two: You should be ready to push back against any proposals in your state to convert public employees from DB pension plans to DC plans.

Lawmakers looking to trim budgets and ideologues who favor turning the pension business over to the Wall Street types have taken aim at public pension systems. They've been quiet the past few years, says Max Bochmann, a school bus mechanic and a trustee of the Illinois Municipal Retirement Fund, because advocating that workers be allowed to invest their own retirement funds has been a tough sell in a down market. "As soon as the market picks up, they'll begin to push again."

This year, lawmakers in states such as California and Virginia—with their eyes on reducing the government's obligation and getting you to shoulder more of the risk—could very well introduce bills proposing that public employees be brought into a DC retirement plan. It happened to Colorado state employees last year, notes Lansford, where the governor pushed through a new DC option for state workers beginning in 2006. Could public school employees be next? "That's our big concern," says Lansford. "It's a foot in the door."

Don't let it happen to you, says Clare Barnett, a social studies teacher in Danbury, Connecticut, and vice president of the National Council on Teacher Retirement. "This is a sleeper issue," says Barnett, "and you may not see it coming. Many members rely on NEA leaders and trustees on the front lines to protect them. But everyone needs to be vigilant. It's time to get educated on the issue, and if the time comes, to fight for it." For more, go to www.nea.org/neatodayextra.

Class dismissed.

—John O'Neil