A divestment movement is marching across U.S. college campuses, borrowing tactics from the 1980s anti-apartheid campaign and using them against oil, gas and coal companies to fight climate change.
This past month, three influential public sector publications – Governing, Pensions & Investments, and Institutional Investor – published “us versus them” stories about pensions, commenting who is on what side of the public sector retirement argument. The “argument” refers to defined benefit (DB) versus everything else: cash balance, defined contribution (DC), or a hybrid. (Learn more about these different plan designs here.)
The debates seem to be dominated by think tanks, special interests, foundations, and other nonpartisan groups. Some of the policy makers who engage do so representing the interests, not necessarily of their constituents, but the ideas of the aforementioned groups.
From these debates, are we learning anything about public pensions? Not so much. Are we gaining insights that might help us create a national retirement income policy for all citizens? Far from it.
There are, however, two take-aways. The first is that the current messages—whatever those messages are—are not getting traction, despite what former Governor Eliot Spitzer declared in his recent unsuccessful bid for New York City comptroller that pensions sell papers,.
At its October conference, the Pew Charitable Trusts shared the results of a poll it commissioned on how the public thinks about public sector pensions. The findings were presented by Bill McInturff, Public Opinion Strategies, and Michael Bloomfield, The Mellman Group.
There were some significant findings among the 1,000 registered voters surveyed, including that some 75 percent do not think public employees’ retirement benefits are too generous. In another finding, a full 85 percent have heard little to nothing about, as the question stated, the “problems with the funding for the retirement system for public employees in [their] state.”
The second take-away is that we should be doing much more to shift the retirement plan discussion from what everyone else is doing (i.e., cookie-cutter solutions crafted by non-practitioners) to what constitutes good retirement plan design based on field-tested experience.
The National Association of State Retirement Administrators (NASRA) has such a list, developed by its members, who are the directors of the country’s 81 largest public plans. Two of the key principles from the list that relate to this discussion are:
- Tailored solutions, achieved by affected stakeholders working through the state and local legislative and regulatory processes.
- Retention of core, indispensable elements of public plan design, namely mandatory participation, shared financing, benefit adequacy, pooled investment and longevity risks, and lifetime benefit payouts.
Rather than “us versus them,” these principles are what should be dominating pension debates. The same Pew-sponsored poll referenced above found that once citizens understood more about public employee retirement plans – such as those for teachers and first responders – they understood that these plans need to be sustainable, that they need to be secure.
Ensuring sustainability—and all other features such as ethical management, sound funding policies, preventing abuses, etc.—can be adequately achieved in only one way: having the facts about that particular retirement system in that particular locality. Only through objective data can we determine how a public retirement system is faring – data that comes from or through the governmental agency, or organization, that manages the plan. This requires that plan to uphold the highest standards of transparency.
That’s another principle in NASRA’s list:
Policy-driven decision making based on objective and pertinent information that fairly reflects the long-term time horizon and economic effects of public plan financing, benefit adequacy and benefit distributions.
As long as the debate focuses on “us versus them”—regardless of who is us and who are them—confusion, apathy, and discord will continue to predominate.
It’s time to get the public retirement plan conversation back on track. Simultaneously, we need to determine how these same sound principles can be more widely applied to the nation at large.
Stanford University launched a massive open online course (MOOC*) on retirement finance this week, led by Joshua Rauh, a professor at the university’s Graduate School of Business.
The ten video lectures are described thusly:
The course begins with the principles of financial economics, such as the distribution of outcomes when investing in stocks, bonds, or annuities. These serve as the building blocks for an understanding of different retirement strategies that can help you improve your asset allocation. Read more
When Detroit’s emergency manager was quoted proposing to close and freeze the city’s defined benefit (DB) plans effective December 31, putting defined contribution (DC) plans in their place, many observers perceived it to be a commonsense suggestion: cut the losses, stem the money drain.