Young Teachers Are Forced into a Lousy Pension System. There Is a Better Alternative.

As our readers know, Sunlight has opined on New Jersey’s public pension crisis, particularly the woeful condition of the teachers’ pension plan, the Teachers Pension and Annuity Fund (TPAF).  A recent report puts TPAF’s funded ratio at 39% (39 cents set aside for every dollar owed), the “most underfunded in the nation.”  We would add that these abysmal numbers are AFTER Gov. Murphy had pumped over $30 billion into the pension system. Murphy has chosen to make full (unsustainable) pension payments into an unreformed TPAF because that’s what his biggest political supporter, the NJEA, wants.  Murphy is taking the easy political way out and leaving the mess for future governors to clean up.

Teachers have been ill-served by TPAF as well, especially younger ones.  Due to years of bipartisan underfunding in which the NJEA played a leading role, the pension system had to be saved from bankruptcy in 2011.  But teachers hired after 2011 saw their pension benefits reduced to a bare-bones level, and all teachers saw their COLA stripped out, which has been especially painful after inflation hit. But given the above funded ratios and the massive amount of money spent simply to tread water, the state does not have the wherewithal to reinstate the COLA or increase benefits for young teachers.  Yet our governor insists on an untenable status quo.

What is the alternative?  Thanks to Garden State Initiative, a New Jersey policy think-tank, we have a sound proposal. We recommend you read the proposal, but here are some highlights:

• Currently, all teachers are forced into the “defined benefit” TPAF, a plan that requires 10 years to vest, is not portable (you lose it if you leave your teaching job), and requires 30 years of service to break-even (only 20% of teachers reach this point). But today’s young college graduates seek mobility and flexibility, so requiring them to spend 30 years in one job may deter them from entering teaching in the first place. Half of teachers leave before 10 years, and these teachers actually end up losing money by being forced into TPAF.
• Teachers should be provided a choice: TPAF or a flexible alternative called the Alternative Benefit Plan (ABP), which is a “defined contribution” plan offered to higher education professionals in New Jersey. It’s like a 401k where the state must provide the guaranteed contributions every year.  Its funding is never in question.  It vests in one year.  It stays with the individual regardless of career choices.
• Particularly relevant to today’s younger generation, the ABP would require smaller employee contributions.  If a teacher leaves her job after 7 years (before TPAF’s 10-year vesting minimum), she would almost double her retirement savings compared to TPAF.
• In states where plans like ABP is the default plan for teachers there have been strong take-up rates, so it seems likely that a significant number of New Jersey teachers would welcome such an alternative.
• With an ABP, taxpayers would not be on the hook for massive unfunded pension liabilities as they are with TPAF.

It’s hard to see how giving teachers access to an ABP hurts them and easy to see how it helps them.  It’s the NJEA that does not want alternatives to TPAF.  It remains wedded to the idea that a defined benefit plan is better than a defined contribution plan, but in the real world TPAF has been a disaster, particularly for today’s younger teachers, who effectively subsidize the system unless they reach full retirement age.

And, as we have learned, what the NJEA wants, Murphy obliges.  Our status quo governor helps to preserve a malign pension status quo.  Once again, good for Murphy and his special-interest political supporters, terrible for the rest of the state.