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By John O'NeilUniversity of Virginia graduate student Lianna Moss is in many ways your typical 22-year-old college student—juggling classes and part-time work, catching Law and Order with her roommates whenever she can, scarfing down way too many meals at Subway.
"I know everybody keeps saying that Social Security will run out of money, but from what I've been reading, that's a farce," says Moss. "My philosophy is, don't fix it if it's not broken." Moss won't start her first teaching job until next fall, but she's already working hard to defend her retirement security. Whether you're new on the job or a grizzled vet, you may want to follow suit, because politicians are moving fast to phase out guaranteed monthly pensions in favor of individual retirement accounts that would subject you to the ups and downs of the stock market—and possibly leave you shortchanged come retirement day. Consider that in the past few months: President Bush began his drive to privatize Social Security, a move that would punch huge holes in the foremost "safety net" of retirement income for American workers. If Bush has his way, risky private investment accounts offered to workers would be accompanied by cuts to guaranteed benefits that could reach 40 percent for younger employees. In January, California Governor Arnold Schwarzenegger vowed to scrap guaranteed pensions for teachers and public employees hired after 2007, a move that would deal crushing blows to the nation's first and fourth largest pension plans. Schwarzenegger said new employees would have to accept "defined-contribution" (DC) plans, such as 401 (k)s, that don't provide a guaranteed retirement benefit. Elsewhere, legislators in Alaska, Georgia, Illinois, Iowa, Kansas, Maine, Maryland, New Hampshire, New Mexico, Oklahoma, and Virginia either have introduced bills or are studying whether to follow Schwarzenegger's lead and force public employees into risky DC plans. The implication is clear: those retirement benefits you've been counting on when you finally walk away from public education are on the line in Congress and in your state legislatures. "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. "Those behind it are counting on the idea that you'll give up a guaranteed lifetime benefit for a chance to take a thrill ride in the stock market. Don't fall for it." The Politics of AgingSo what's behind this push? For one, a changing demographic. Pension funds and Social Security itself face challenges from the surge in the number of baby boomers due to retire over the next two to three decades—and expected to live longer in retirement than past generations. So guaranteed retirement funds, such as Social Security and traditional defined-benefit (DB) pension plans, must come up with the funding to pay growing numbers of retirees for far more years than in past decades. The sticking point is that some policy makers believe you—not your employer—should be on the hook if funds for your retirement come up short. The debate centers on risk, and who should bear it. A quick primer: all retirement funds—traditional pension funds as well as individual accounts such as 401 (k)s—generate a substantial portion of the nest egg by investing in an array of stocks and bonds. In a traditional DB pension plan, which is what 90 percent of public employees belong to, trustees guided by professional money managers make the investments. The investment strategy is long-term because the fund pools contributions on behalf of hundreds of thousands or millions of participants, all of whom are due to retire at different times. Most importantly, the investment risk is borne by the fund itself, since it must make good on the guaranteed benefits it owes current and future retirees. Under defined-contribution plans such as 401 (k)s, which have become more common in the private sector, the employee bears all the risk because the account balance of his or her personal nest egg is the only source of retirement savings. There's no such thing as a guaranteed monthly retirement check under a DC plan. If you make poor investment decisions—or are just unlucky enough to have the financial markets go south when you retire—you'd be the one who would suffer the consequences. Workers with 401 (k) plans were extraordinarily hard-hit by the huge stock market declines of 2000–02; many saw their retirement nest eggs decimated. 'The Tide Has Turned'
For starters, the sharp gains on Wall Street pumped up the value of pension funds. As they grew flush, many were able to cut the contribution rates of employers such as local and state governments. Naturally, they grew accustomed to the lower rates. Now, "the tide has turned," says Leonard Bumbaca, a math teacher at Annandale High School in Annandale, Virginia, and a pension trustee. "State and local governments are being hit with requirements to make extra contributions." And with their burden rising, experts say, they may be more open to changes that lessen their obligation. They're getting some enticing nudging, too. "They're using buzzwords like 'choice' and 'individual empowerment,' and they say DC plans will allow you to 'take charge of your own retirement,'" says Clare Barnett, a veteran social studies teacher in Danbury, Connecticut, and vice-president of the National Council on Teacher Retirement. But their real motive, she and others say, is to cut taxes and enrich private businesses at the expense of public institutions and employees. For many it's plain to see: Large financial firms have a huge stake in the phase-out of traditional pensions in favor of individual retirement accounts, notes Max Bochmann, a school bus mechanic and trustee of the Illinois Municipal Retirement Fund. That's because they'll earn far more charging fees to individuals managing their own retirement accounts than they would dealing with the mammoth pension funds. Education employees need to be wary, then, of the burgeoning campaign to portray DB plans as a time bomb of public obligation soon to explode, Bochmann and others warn. "To create a crisis atmosphere, they'll claim that plans are severely underfunded," says Nancy McKenzie, a pension specialist with NEA. Actually, the average pension funding level now is about 90 percent. By comparison, in the 1970s, average funding was only 50 percent. "The reality is that these funds have a 30-year time frame," for smoothing out the effects of investment gains and losses, says McKenzie. "They will have ups and downs, but the funds are managed by professionals and adjustments will be made." Critics of DB plans also overstate the public's funding obligation, McKenzie points out. Nationally, only about one-fourth of the cost of pension benefits is borne by public employers; the remainder comes from contributions by the employees themselves and from investment earnings. Battle Brews in California
Schwarzenegger, who charged that the state's pension funds are "another financial train on another track to disaster," is supporting a bill in the state legislature to bar public employees after 2007 from joining a defined-benefit pension plan. He has vowed that, if the legislature does not pass the bill, he'll back a ballot initiative proposal by the anti-tax Howard Jarvis Taxpayers Association that's waiting in the wings. Schwarzenegger's move to terminate new enrollment into the California State Teachers' Retirement System (CalSTRS) and the California Public Employees' Retirement System (CalPERS) after July 2007 is the biggest threat to a state pension fund in recent memory, in part because of the scope of the two systems and the tendency for California's policy ideas to migrate to other states. CalPERS, which represents 1.4 million state and municipal employees, including education support professionals, is the nation's largest pension fund, with $182 billion in assets. CalSTRS has 750,000 members and assets of $125 billion. Barbara Kerr, president of the California Teachers Association (CTA), says that after Schwarzenegger announced his plan to push employees into a defined-contribution plan, "the only people dancing in the street were the people on Wall Street." Brokerage houses will load up on fees for managing individual retirement accounts, she says, far beyond what they can gain doing business with the pension fund. CTA is fighting Schwarzenegger's proposals with a blitz of radio ads and also has joined a coalition with groups representing state employees, firefighters, and police officers, Kerr says. Dana Dillon, a teacher at Weed Union Elementary in Weed, California, views Schwarzenegger's plan as "a serious threat."
New employees stuck in a DC plan wouldn't have a real benefit to count on, Dillon says. "It's a bad deal, because it takes a guaranteed benefit and makes it into an iffy proposition. Take a look at the debacles of Enron and WorldCom. People lost their retirement accounts totally." And efforts to recruit teachers will be harder without a solid pension plan, Dillon says. "In the public sector, we tend to have lower salaries," she points out, "and one of the things that makes that a little easier to swallow is that we have an adequate, guaranteed retirement benefit." A little retirement security would suit Annie Pestolesi just fine. But as a sophomore at the University of California-Davis—due to graduate in 2007—Pestolesi worries she can't count on it.
"They're in the process of planning their retirement—where they're going to go and so on," says Pestolesi. "And they know how much money they'll have per month" to budget with. "Having that security is something I'd love to have," she adds. "I love teaching, but where? Who's going to give me the option for a long-term commitment?" If the opportunity to get a traditional pension through CalSTRS isn't available to her, "I might look for a job in a different state," she says. It will be California's loss. Traditional Plans Win OutWhile Schwarzenegger steers California educators toward financial insecurity by forcing public employees to accept risky DC plans, the evidence that DB plans afford better retirement security continues to stack up. Nebraska, which has offered both DB and DC plans to different groups of public employees, is a textbook case for the advantages of traditional pension plans, says Roger Rea, a former teacher in Omaha and member of the Nebraska State Education Association-Retired.
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 difference in returns had a marked effect on the ability of workers to count on an adequate benefit at retirement. NPERS' study found that 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 defined-contribution plan to switch over. Nebraska isn't the only state that's soured on its DC plan. West Virginia, which in 1991 began requiring all new employees to enter a new DC plan, is also looking into switching back to its traditional DB pension system, according to David Haney, executive director of the West Virginia Education Association (WVEA). The defined-contribution plan has been beset by problems: the plan offered too few investment choices, employees were given inadequate information to make investment decisions, and the account statements were hard to understand. "It's just turned out to be a mess," Haney says. And as a result, "We're going to have a lot of people who are going to have to work long after they should have been able to retire" because their DC plans will fall short. WVEA is asking the state legislature to merge the DC plan with the more established DB plan, a move that would bolster employees' retirement security as well as save the state an estimated $1.8 billion over the next 30 years. A Push for Private AccountsThe debate over what really is the most effective approach is now spilling onto the national stage, but with this twist: Would private retirement accounts within Social Security work any better than defined-contribution plans? Retired teacher Barbara Snyder doesn't think so. Snyder was born in Denison, Iowa, in 1935—the same year President Franklin Roosevelt signed the landmark retirement "safety net" into law. After a long career teaching in Iowa, Florida, Alabama, and Tennessee, Snyder's now drawing Social Security benefits of about $900 a month, while continuing to work as executive director of the Tennessee Retired Teachers' Association (TRTA). And she's waging a determined fight so that younger workers can look forward to a similar, guaranteed benefit when they retire. "Social Security was designed as a social insurance program, and it's been very effective that way," says Snyder. As for reports of Social Security's long-range financial challenges (see page 27), Snyder says, "There are ways to keep it solvent without doing anything drastic."
Leaked details of Bush's plan indicate he'd push for severe cuts to Social Security benefits by proposing that future benefits be tied to increases in the cost-of-living, rather than increases in wages. (Wages typically rise faster than the cost-of-living.) Worse still, Bush's insistence on privatizing Social Security with the addition of individual investment accounts means additional cuts to the benefits you can expect when you call it quits. Under the plan Bush is using as a model, a worker who is 45 today could expect cuts to his guaranteed benefit of 15 percent, according to an analysis by Dean Baker of the Center for Economic and Policy Research. A 35-year-old could expect a benefit cut of about 25 percent, and a 15-year-old just entering the workforce would have her guaranteed benefit cut by almost 40 percent, Baker found. And how big a perk is that private investment account? The rough details of Bush's plan are that workers born after 1950 would be able to divert up to 4 percent of their payroll taxes into an individual account, beginning in 2009, and invest in stocks and bonds. Although it's possible workers could make up the benefit cut through astute investing, the odds are stacked against them. By their very nature, private investment accounts generate administrative and management fees far beyond the costs of traditional Social Security. The Congressional Budget Office estimates that the annual cost of an average mutual fund that received 2 percent of a worker's taxable earnings would, over the course of that worker's lifetime, result in a 23 percent reduction in the size of the resulting nest egg. Social Security's costs, by contrast, would reduce the balance by only 2 percent. Moreover, the introduction of private accounts would require financing the current system while the system of private accounts gets up-and-running. Costs of transitioning to the new system could reach a trillion dollars or higher in 10 years and inflate the federal deficit, experts say. In a nutshell: you'd struggle to get a benefit as good as they get today, and Social Security itself would be weakened. NEA members are lining up to oppose Bush's plan. Snyder's been spreading the word to TRTA members about the importance of keeping Social Security safe, and she has also e-mailed or personally talked to three members of Congress from Tennessee. And she's hardly alone. More than 30,000 members have expressed their opposition to privatizing Social Security by signing a petition at www.nea.org/lac/socsec. There's no time to waste, says John Jensen, a Nebraska retiree and former president of the National Council on Teacher Retirement. "The next six months will be crucial," he says. "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." Gen Y Guide to Retirement Security
A Fix Worth Fighting For
Thousands of public employees in 15 states, like Riegler, are denied Social Security benefits earned by themselves or their spouses because of the Government Pension Offset (GPO) or Windfall Elimination Provision (WEP). (Most of those affected are educators who work in states that do not pay into Social Security—Alaska, California, Colorado, Connecticut, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Missouri, Nevada, and Ohio—or selected districts in Georgia, Rhode Island, and Texas.) Riegler was in Washington, D.C., recently as a member of NEA's GPO/WEP cadre, which promotes grassroots action to get these unfair laws overturned. Before he headed to Capitol Hill to talk to his members of Congress, Riegler admitted it irked him that lawmakers will consider expensive new changes to Social Security—but have so far failed to pass NEA-backed legislation to repeal the GPO and WEP. "It gripes me that when you talk to legislators, they say, 'What about the cost?'" says Riegler. "But they've been borrowing money from the Social Security Trust Fund for the war, and to pay for tax cuts, and for every other thing." So Riegler and other NEA members headed to Capitol Hill to press NEA's message on Social Security to members of Congress, and by week's end, the NEA-backed Social Security Fairness Act to repeal the offsets had picked up several additional sponsors. The Act, introduced by Representatives Howard McKeon (R-CA) and Howard Berman (D-CA), had won the support of 203 co-sponsors at press time. In addition to working to protect Social Security from privatization and repealing the GPO and WEP, NEA also is trying to ensure any changes to Social Security do not include provisions for mandatory coverage. That's because requiring all workers to participate in Social Security would hurt existing public employee pension plans and create financial burdens for state and city governments. Already, more than 30,000 NEA members like Riegler have signed a petition urging Congress to repeal GPO and WEP and protect Social Security from privatization or benefit cuts. Let them hear from you, too! Sign the petition at www.nea.org/lac/socsec. Revealing Truths About Social Security
What you heard"Social Security is going broke."The real deal:The surplus in the Social Security Trust Fund is climbing because payroll taxes and interest on the Trust Fund accumulations bring in more each year than Social Security pays out in benefits. The Trust Fund now stands at $1.5 trillion and is predicted by trustees to reach $5.3 trillion by 2018. The year 2018 is a critical one because that's when actuaries predict that Social Security will begin paying out more dollars in benefits than it takes in. But the Trust Fund is large enough to cover full benefits until at least 2042 and maybe longer. After that date, Social Security will only be able to pay about 75 percent of benefits unless changes are made. Remember that Social Security can never literally go broke—payroll taxes (currently 12.4 percent, split between employee and employer) will continue to be collected to pay benefits. What you heard"A flood of retiring baby boomers will overwhelm the system, so younger workers will never get their guaranteed benefits."The real deal:Granted, huge numbers of Baby Boomers (those born between 1946 and 1964) have begun to retire, and they'll live longer than retirees of past generations. But the government has been planning for this demographic bubble for decades. In fact, Federal Reserve Chairman Alan Greenspan headed a commission that in 1983 recommended hiking the payroll tax to its current level of 12.4 percent—in part, because it was deemed important to build reserves (that Trust Fund, again) to support retiring Boomers. If we want to guarantee Social Security benefits to younger workers after the Boomers head off to their cabanas, what will it take? Not as much change as you may think. The nonpartisan Congressional Budget Office says that Social Security could pay out full benefits for the next 75 years with a tax increase of less than one-quarter of the hike we made in the 1980s. Other options include raising the amount of income subject to the Social Security payroll tax. (At present, workers pay no Social Security taxes for any earnings above $89,000.) What you heard"Social Security earns so little interest that you'd do better with a private account so you could invest on your own."The real deal:Advocates of private investment accounts frequently note that, historically, stocks have returned about 7 percent annually. The Social Security Trust Fund in 2003 earned 6.5 percent interest, with extraordinarily low risk. Dozens of studies have shown that individual investors underperform the stock market as a whole—and even if you could match the market's return, you'd be left holding the bag if your retirement was slammed by a bear market. Moreover, the expenses charged by financial firms to manage private accounts will eat into the returns. The private accounts proposal most likely to be favored by President Bush assumes expenses of 5 cents on the dollar. In Chile and Great Britain, where the government instituted private retirement savings accounts, expenses soared to about 15 cents on the dollar. Social Security keeps those checks rolling out with administrative fees of under a penny on the dollar. You won't know for years how well your investments pan out, but one thing's for certain—private accounts would require slashing the guaranteed benefits of future workers by as much as 40 percent. How lucky do you feel? What you heard"Social Security pays such a modest benefit that no one could really count on it to live on anyway."The real deal:The sad truth—many do. Two-thirds of beneficiaries receive more than one-half of their income from Social Security. For one-fifth of retirees, Social Security represents their only source of income. Without it, nearly half of the elderly would fall into poverty. Moreover, Social Security assists others besides retirees. It pays benefits to workers who become disabled and to spouses and dependents of disabled or deceased workers. All the more reason to make sure any changes to Social Security don't threaten society's most vulnerable. Vision Quest
Get your financial house in orderMost experts say you'll need to have about 80 percent of your current annual pretax income to make ends meet during retirement. Your pension and Social Security (for those who qualify) will serve as the foundation, but you'll have to pull the remainder from sources such as savings. That's why you should check into whether your employer offers a tax-deferred supplemental retirement savings program, such as a 403 (b), and take advantage of it if you can. "The earlier you can begin saving the better, even if it's only a little bit," says Connie Wittig, who conducts pre-retirement workshops for the Arizona Education Association-Retired. She started putting $10 from each paycheck into a tax-deferred annuity in 1969, increased it whenever she got a raise, and ended up with "a very nice contribution to our nest egg" when she retired in 1996. Scale up your activismSince state legislatures usually wield considerable power over things like pensions and the health insurance premiums paid by retirees, the benefits that will await you when you retire 10, 20, or 30 years from now often are on the line today. "Teachers are starting to realize that—like it or not—they have to become politically active to protect their retirement benefits," notes Bob Scalzo, who taught in Danbury, Connecticut for 37 years. Last year, members of the Connecticut Education Association (CEA) pushed for a constitutional amendment to ensure that the state's pension fund would be 100 percent funded. Scalzo and other CEA activists came close to getting the provision passed, but, in the end, it didn't. They'll be right back fighting for a new bill again this year, he says. So be prepared to collar your local lawmakers or blast them a few e-mails to keep your benefits intact. Imagine the possibilitiesGetting ready for retirement isn't only about money issues. What do you intend to do with yourself once you're no longer rushing out the door each weekday morning? "It's really important to ask that question so that you don't end up feeling lost," says Gloria Holland Smith, a former English teacher in the Salem-Keizer school district who runs Oregon Education Association-Retired workshops on preparing for the emotional side of retirement. At her workshop, participants sketch out the skills they'd like to use more in retirement (such as public speaking), discuss their fantasy vacations (hiking across Australia or going on a jungle cruise), and ponder whether to downsize their home or move from city to country. "It's figuring out what those dreams are and understanding that, if you're going to do it, now is the time," says Smith. "You're not going to want to wait 20 years." Brace yourself for ups and downsWittig, formerly a school secretary in the Paradise Valley Unified School District in Phoenix, Arizona, was five years away from her scheduled retirement when she got an unexpected offer. The district was dangling an incentive package that would allow her to retire four months later with no reduction in benefits. Time to reserve a poolside chair and fire up the hibachi, right? Instead, she languished. "I had a terrible time the first two years," says Wittig. "I simply wasn't ready to retire emotionally. I hadn't really prepared for what it meant to be apart from those wonderful little kindergartners and the staff, and the separation was so difficult. Everyone I wanted to play with was still working." You may be able to avoid similar emotional turbulence if you… Start to broaden your horizons nowWittig suggests that, while they're still active, teachers and education support professionals begin exploring other interests off the school campus. "Try to discover something new that you'd be interested in," says Wittig. "Get involved in activities—it may mean learning a new language, or volunteering in a hospital, or getting more involved in a church," she says. "Do these as an initial first step, and it will give you a sense of what you may or may not want to do after you retire." Learn more about the benefits of NEA-Retired or pre-retirement workshops.
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