Like the mythological phoenix rising from the ashes, attacks on our public retirement systems are once again making news. At the request of Speaker of the House Jim Tucker (R-Terrytown), the joint Senate and House Committees on Retirement are meeting to discuss “reforming” the retirement incomes of teachers, school employees and other public servants.
Their mission affects the four state retirement systems: the Teacher Retirement System of Louisiana, the Louisiana School Employees Retirement System, the Louisiana State Employees Retirement System, and the Louisiana State Police Retirement System.
As with similar legislative efforts over the past years, Tucker wants to consider a radical restructure of the four state systems. Future employees would have a retirement plan that depends solely on the performance of the stock market. Those unfortunate enough to have their retirement savings invested in a 401(k) know all too well how badly that can turn out.
The debate is over two forms of retirement planning. A defined benefit plan, like the ones now in effect for public employees, bases retirees’ pensions on their years of service and the salaries they earned. Money paid into the system by employees and employers is invested by the retirement system. The plan provides a regular, dependable income for the retiree. Surplus funds earned in good years offset losses in bad years to keep pensions steady.
For members of the teachers’ and state employees’ retirement systems, a separate fund known as the “experience account” provides cost-of-living adjustments to the retiree pensions.
A defined contribution plan, on the other hand, would deposit contributions by the employee and employer into investment accounts. Retirees would receive an income based strictly on the investments’ earnings. These investments would be chosen by the employee, not by professionals employed by the state retirement systems.
Their incomes could go up or down depending on the vagaries of the stock market. Since 2007, many investors have seen their 401(k) accounts drop by 30 to 50 percent, although markets are now showing some resurgence.
Cost-of-living adjustments are not included in defined contribution plans because the employees are solely responsible for their retirement income. Furthermore, since Louisiana public employees do not pay into Social Security, investment earnings would be their only income.
Rep. Tucker argues that a defined contribution might be less expensive to the state. Under this plan, there would be no unfunded accrued liability in the future. But the existing UAL, which totals $12 billion for all state retirement systems, would have to be paid by the state if there were a conversion to a defined contribution plan.
Experts aren’t so sure that Rep. Tucker’s plan would save money. At a meeting of the committees on October 19, economists testified that, with the exception of the recent economic downturn, public retirement investments have shown good returns over time.
Because the actual amount paid into the system by the state is about equivalent to an employer’s share of FICA taxes, there would be no direct saving for the state.
On balance, the Louisiana Federation of Teachers believes the defined benefit plan is the best option to provide a secure and comfortable retirement for public school teachers and support staff. After a lifetime of work, all employees deserve the security of a fair, guaranteed pension. No American's retirement security should be subject to the vagaries of the stock market or the manipulations of a few unscrupulous insiders.