Opinion Extra

401(k)-style plan not the answer for SC teachers

Dallas Morning News

The state Senate’s plan to eventually close the state employee pension fund for future employees and place them into a risky, inefficient 401(k)-style plan is the wrong direction for South Carolina, and the House should reject this idea.


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Pensions remain the best way to provide a secure retirement for all workers. A handful of states have abandoned pensions for what are called defined-contribution (as opposed to defined-benefit) plans and have suffered the consequences.

According to the National Institute on Retirement Security, a typical defined-contribution plan costs the state 91 percent more than a typical defined-benefit plan.

Additionally, unfunded liabilities increase in the traditional pension system once the state switches new employees to a defined-contribution plan. and fewer workers are able to retire with dignity in a 401(k)-style system.

Alaska, West Virginia and Michigan have learned this the hard way, and South Carolina would do well to learn from them.

Costs in Alaska’s pension system skyrocketed after the state switched to a 401(k)-style plan because there was no longer money coming into the system. Additionally, the state refused to make pension payments, and with an aging workforce still collecting pensions, the unfunded liability has doubled to $12.4 billion.

Michigan’s traditional pension system was funded at 109 percent when the state switched to a 401(k)-style plan in 1997. By 2012, the traditional plan was funded at only 60.3 percent, and the median balance in employees’ accounts was just $37,260 — a small drop in the bucket of what’s required to retire with dignity.

After decades of not funding the plan, West Virginia closed its Teacher Retirement System in 1991 and moved new hires to a 401(k)-style plan. In 2005, only 18,000 active teachers were supporting 27,000 retirees in the pension plan, and the funding funding level plummeted to 25 percent. After the state found that the pension plan cost half of what the 401(k)-style plan did, it re-opened the pension system, 78.6 percent of teachers moved into the system, the funding level bounced back, and today West Virginia’s teachers enjoy an average annual pension payment of $18,964.

Pensions are more cost-effective than defined-contribution systems, and they offer a safe and reliable retirement that doesn’t put all of the risk on the individual. They also earn 0.7 percent higher returns that 401(k)s, are well-regulated and professionally managed and can have lower fees.

As many working people know, 401(k) accounts were hit hard during the recession, and many lost their hard-earned retirement savings after the crash — forcing them to work longer than originally planned and hurting their stability in retirement. In the first two quarters of 2008 alone, 401(k)s and IRAs lost about $2.4 trillion.

We need to be moving more workers into pensions, not moving more workers into 401(k)s.

Switching the pension system for South Carolina’s teachers, firefighters and nurses to a 401(k)-style system is an ill-informed move.

South Carolina should learn from other states that have done this and chart a different course.

Ms. Hampton is president of the S.C. Education Association; contact her at bhampton@thescea.org.