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Finding Common Ground In Pension Reform: Lessons from the Washington State Pension System

Dan Goldhaber and Cyrus Grout
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States and localities across the nation are struggling to adequately fund their public retirement systems. Pervasive underfunding of public pension plans has raised concern regarding the efficacy of traditional pension plan structure and design. This topic is particularly relevant in K-12 education, where debates are waged over whether teacher pension plans should be maintained as defined benefit (DB) systems or if they should transition to defined contribution (DC) systems which are, by definition, fully-funded.

As public agencies consider the tradeoffs between DB and DC pension systems, it is important to gain insight into what implications pension reforms might have on the composition of the teacher workforce and the retirement security of its members. In Finding Common Ground In Pension Reform: Lessons from the Washington State Pension System, Dan Goldhaber and Cyrus Grout synthesize lessons from research on Washington State. Since 1996 Washington teachers have been enrolled in either a traditional DB plan or a hybrid DB-DC plan, and teachers were able to choose between enrolling the two plans during two periods of time. In particular they find:

  • The state’s financial exposure is significantly lower under the hybrid plan because its per-teacher pension liability is approximately half as large.
  • Large majorities of teachers (in two choice periods) preferred the hybrid DB-DC pension system over the traditional DB system.
  • There is evidence that more effective teachers are more likely to enroll in the hybrid plan, which suggests states can maintain teacher-workforce quality while simultaneously reducing financial risk.
  • The average teacher in the hybrid system contributes more to retirement than would be contributed if enrolled in the traditional DB system.
  • Teachers are likely to obtain a level of retirement security in the state’s hybrid-plan that is comparable or better than that provided by the traditional DB plan.
  • Teachers appear to value retirement savings far more than empirical research had previously estimated.

The implication of the experience in Washington State is that teacher pension systems can be reformed in a way that is attractive to both teachers and states and ensures that significant resources are being set aside for teacher retirements.