Green Room

Is NEA Surfing Its Own Pension Tsunami?

posted at 5:32 pm on July 30, 2012 by

The growing obligation to fund public employees’ defined benefit pensions is the stuff of daily media stories and commentary, and is the constant headache of state governments and both political parties. Public sector unions defend these plans vigorously, but they also have to finance them for their own employees. While the National Education Association has its own share of short-term budget problems, the long-term picture also indicates shoals ahead.

The union staff pension fund covers virtually every permanent employee who works at NEA headquarters in Washington, DC, as well as participating workers in state and local affiliates. The current number of participants in the plan is unknown to outsiders, but the benefits are generous. NEA employees contributed nothing to their defined benefit plan, and were able to enjoy the best of both worlds, as NEA offered matching contributions to a voluntary 401(k) defined contribution plan as well.

Tough times led the national union to require employees hired on or after June 9, 2009 to contribute 3.5% of the pension amount, and the 401(k) plan was suspended in the latest budget.

The pension numbers are staggering, considering the number of employees/retirees involved must only amount to some several thousand. As of January 1, 2011, NEA had accumulated $644.7 million in pension liabilities, for which it had $556.3 million available. For that fiscal year, the union contributed $25.2 million to the staff retirement plan.

But those figures are a snapshot, and don’t account for some important facts. Staff salaries rise over time, and with them the amount of pension contributions and liabilities. NEA estimates that with projected staff salary increases, its pension payout obligations are almost $700 million.

State governments have learned that these liabilities go from a problem to a catastrophe when the number of contributors to the plan decreases while the number of beneficiaries increase. The parallel issue at NEA is the loss of members, leaving the union with less dues revenue to fund rising staff pension liabilities.

Pension reform in politically difficult in every state, but is even more problematic internally for unions, since they are ideologically wedded to the defined benefit approach. The question for both states and unions is how happily younger employees will tolerate lesser benefits for themselves to fund better benefits for their elders.

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The disastrous investment climate can’t be helping either. Consider that a small but real silver lining

njcommuter on July 30, 2012 at 6:36 PM

education time! in case nobody with a real job didn’t notice, the old “defined benefit” plans are getting pretty rare. They require that you discount the projected payment stream until the last person is gone (projected liability), then forecast the projected earnings/inflows.

with investment returns in the single digits, the projected outflow (on a present value basis) is huge (a payout 20 years away at 10% is much less than that same payout at 5%).

And the projected return on assets is meager at best…double whammy

teejk on July 30, 2012 at 7:31 PM

Rules regarding pension promises:

1. Some promises will have to be broken, or
2. All promises will have to be broken to some degree, or
3. All promises will have to be completely broken, period.

When the remaining workers find supporting the retirees becomes too onerous, they will either ram changes through the current system (including courts), or the current system will collapse and another will be set up, or there will be no system. None of these alternatives bode well for retirees.

In other words, when there’s no more blood in the turnip, there will be no power on earth that will keep the checks coming and cashable… it’s only a matter of time.

Marcola on July 30, 2012 at 7:46 PM

As of January 1, 2011, NEA had accumulated $644.7 million in pension liabilities, for which it had $556.3 million available. For that fiscal year, the union contributed $25.2 million to the staff retirement plan.

How much did they contribute to the Democrats?

RJL on July 30, 2012 at 11:43 PM

Defined benefit pensions suffer from a combination of human nature and harsh mathematics.

If a million people contribute a dollar per week for some lovely benefit five years in the future, and it occurs to one of them to worry about it, he’s going to worry $1 worth.

On the other hand, if someone is thinking of looting the plan, there will be $104M sitting there after just two years. You can spend a million dollars making the worrywart think everything is wonderful and still have a nine-figure take.

Which is why defined-benefit pensions should be as illegal as their closely-aligned brethren, Ponzi schemes.

cthulhu on July 31, 2012 at 2:47 AM