Comparisons And Projections The Teachers Superannuation Fund In Relation To Public Sector Pension Plans

Pensions are an important but comparatively unexamined component of human resource policies in education. In an increasingly competitive world where employees are more mobile than ever, pension policies that were designed in the last century may be out of step with the needs of both individuals and schools. This background paper aims to foster understanding and informed discussion of public education pensions. It describes the current system; examines concerns about funding, sustainability, equity, and effectiveness; and discusses pension plan structures and some options for pension plan redesign. Like most state and local government employees, teachers are still covered largely by defined benefit pensions based on their final salaries and length of service. Such pensions have been replaced in many private sector firms by defined contribution plans. The legal and economic context is, however, substantially different for public and private sector pensions. Notably, a sizable minority of public sector employees are not covered by Social Security retirement benefits. State and local government pensions are "prefunded" to varying degrees. While most plans currently have some unfunded liabilities, analysts do not foresee a broad financial crisis in the public pension arena. Public pensions do, however, face some threats to their financial sustainability caused, for example, by employers' failure to make actuarial required contributions and by the future stresses that other unfunded commitments such as retiree health care will place on state and local governments. Distinct from the question of whether teacher pension plans are financially sustainable is the question of how fairly they treat all teachers they serve and what if any effect they have on schools' ability to find qualified staff. While traditional defined benefit plans with their back-loaded benefits treat long-serving teachers well, they tend to short-change individuals who do not work a full career in teaching or who move from state to state. The structure of teacher pensions may not only be inequitable for individual teachers but can contribute to teacher shortages by discouraging people from moving to schools where their skills and knowledge are most needed. The debate over whether public pensions need to be redesigned has frequently taken the form of an argument over whether defined benefit pensions should be replaced by defined contribution plans. Framing the question in this way obscures the fact that the boundaries between various types of pensions are porous, and plans can be designed to include a variety of features depending on the objectives being sought. Once these objectives are defined, various plan types and features can be examined to determine whether existing arrangements or some new combination would best meet those objectives. This paper raises some questions about objectives for teacher pension plans that merit re-examination, offers an initial look at some of the options available for rethinking teacher pension design, and describes one option, the defined benefit cash balance plan, that to date has received little attention in the public sector. Appendix tables report specific features of teacher pension plans. (Contains 57 endnotes, 2 figures, and 9 tables.) [This paper was prepared with financial support from the Donnell-Kay and Piton Foundations.].

In the wake of the financial crisis and Great Recession, the health of state and local pension plans has emerged as a front burner policy issue. Elected officials, academic experts, and the media alike have pointed to funding shortfalls with alarm, expressing concern that pension promises are unsustainable or will squeeze out other pressing government priorities. A few local governments have even filed for bankruptcy, with pensions cited as a major cause. Alicia H. Munnell draws on both her practical experience and her research to provide a broad perspective on the challenge of state and local pensions. She shows that the story is big and complicated and cannot be viewed through a narrow prism such as accounting methods or the role of unions. By examining the diversity of the public plan universe, Munnell debunks the notion that all plans are in trouble. In fact, she finds that while a few plans are basket cases, many are functioning reasonably well. Munnell's analysis concludes that the plans in serious trouble need a major overhaul. But even the relatively healthy plans face three challenges ahead: an excessive concentration of plan assets in equities; the risk that steep benefit cuts for new hires will harm workforce quality; and the constraints plans face in adjusting future benefits for current employees. Here, Munnell proposes solutions that preserve the main strengths of state and local pensions while promoting needed reforms.

Pension reform is high on the policy agenda of many advanced and emerging market economies. In advanced economies the challenge is generally to contain future increases in public pension spending as the population ages. In emerging market economies, the challenges are often different. Where pension coverage is extensive, the issues are similar to those in advanced economies. Where pension coverage is low, the key challenge will be to expand coverage in a fiscally sustainable manner. This volume examines the outlook for public pension spending over the coming decades and the options for reform in 52 advanced and emerging market economies.

Chile’s pension system came under close scrutiny in recent years. This paper takes stock of the adequacy of the system and highlights its challenges. Chile’s defined contribution system was quite influential when introduced, and was taken as an example by other countries. However, it is now delivering low replacement rates relative to OECD peers, as its parameters did not adapt over time to changing demographics and global returns, while informality persists in the labor market. In the absence of reforms, the system’s inability to deliver adequate outcomes for a large share of participants will continue to magnify, as demographic trends and low global interest rates will continue to reduce replacement rates. In addition, recent legislation allowing for pension savings withdrawals to counter the effects from the COVID-19 pandemic, is projected to further reduce replacement rates and increase fiscal costs. A substantial improvement in replacement rates is feasible, via a reform that raises contribution rates and the retirement age, coupled with policies that increases workers’ contribution density.