Rudy Fichtenbaum: What Are the Characteristics of a Good Pension?

 What Are the Characteristics of a Good Pension?

Rudy Fichtenbaum

Teachers are generally people who are willing to sacrifice current income because they believe by shaping young minds, they can make a difference, helping students realize their full potential. People go into teaching because they believe in service, in giving back to communities that gave them the opportunity to get an education. Ask anyone “Who was your favorite teacher or college professor?”, and they will almost always be able to answer in an instant. They will also be able to tell you how that individual made a difference in his or her life. Teachers know they are not going to be rich, but when they started teaching, they were promised a dignified and secure retirement and a guarantee that inflation would not impoverish them. 

A pension fund is not a partnership (STRS’s mission statement notwithstanding). A partnership is either a legal relationship between two or more joint principals or a relationship requiring close cooperation between parties with joint rights and responsibilities. A pension is neither. A pension fund is similar to a mutual insurance company where members get the right to select management that works in the interest of members. 

STRS is our pension. We paid for it with our hard-earned money, and we have a right to expect that the people who serve on the Board will represent our interests. We have right to expect the STRS management team to work in our interest, and in return we should be willing to compensate them fairly. Although STRS engages in many of the same activities as mutual funds and hedge funds, it is fundamentally different because the people whose money STRS invests cannot withdraw if they feel they are not being treated fairly. 

So, a pension needs to have a culture that ensures that the STRS management team serves members. If all you care about is making money and getting a bonus, then you are working in the wrong business. At presentations by the STRS management team at board meetings, we continually hear about how returns are exceeding benchmarks, even if those benchmarks were chosen or manipulated to enable staff to get bonuses. But even if STRS were using legitimate benchmarks and the STRS management team were outperforming, they would not necessarily be doing a good job for members. That is something that the STRS management team does not seem to understand. At the end of the day, we (the members) measure the success of the pension, not by its ability to outperform benchmarks, but by its ability to provide us with a secure pension. 

So far, the only proposals put forward to “fix” our pension by the STRS management team have been to increase member contributions, raise the years of service and the retirement age, increase the years used to determine the FAS, and cut and then eliminate the COLA.

What is needed is a two-fold solution. First, the management team with the Board and the majority of stakeholders should be working together to increase state support for education, specifically to increase employer contributions. Employer contributions have not increased since January 1984. Contrast that with the 60% increase in employee contributions since 1984. A comparable increase in employer contributions would raise their contributions to 22.4%. This would still be below the median employer contribution rate of 25.3% in non-Social Security states for 2019 according to the Center for Retirement Research at Boston College¹. Again, contrast the low level of employer contributions with those of employees. Active members contribute 14%, far above the median in non-Social Security States, which is only 9%

There are about 500,000 STRS members; many of us have spouses, and we all have families. Together, we can wield more than a little political power! It is time to start organizing, working to elect public officials who recognize that they must adequately fund education or risk losing the ability to attract the best and the brightest to become educators.

The second and most immediate solution is to look for new and innovative ways to invest that can increase returns without increasing risk. Instead of thinking that with active management we can outperform Wall Street or by falling for investing in new assets classes like private equity and hedge funds, we need to look at other pensions that have been successful in providing adequate funding for their members.

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¹www.publicplansdata.org

Rudy Fichtenbaum is Professor Emeritus of Economics at Wright State University.  In May, 2021, he was elected to a retired seat on the STRS Board, effective September 1, 2021.