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Saturday, February 13, 2016

Saturday, February 13, 2016

On the Virtues of Defining Benefits: Two Readings of the Retirements Options Task Force

In the context of ongoing doubts about the value of Defined Benefit pensions to public institutions and the people who serve them, we offer two pieces of essential reading for your long weekend.  One is the UC Academic Senate Chair's letter to President Janet Napolitano (Hare) about the Senate review of the recommendations of her Retirement Options Task Force (ROTF). Posted a day after the Academic Senate Assembly rejected the ROTF recommendations in their entirety, this 6-page letter summarizes over one hundred pages of Senate commentary from across the UC system. The commentary is distinctive for detailing the abundant negative consequences of the proposed "2016 Tier" ROTF proposals: one is that the higher salaries required to make up for lower retirement benefits will come out of strapped campus operating budgets, insuring more structural crises of the kind the Berkeley campus announced this week.  It is also distinctive for rejecting the Task Force ground rules, meaning both the salary cap on DB pensions for 2016 Tier hires and the mode of its imposition--the back-room deal between two people, Gov. Jerry Brown and UC President Napolitano. The Hare letter notes that the ROTF recommendations "received no positive support," and that their effect would help change UC into "a stepping stone to a better institution rather than a university where faculty invest their lives and careers." Pointing out that since no current employees would be affected,"no comments can be ascribed to self-interest," the Senate letter notes that members saw the ROTF options as "the latest in a series of [UC] compromises to quality."   At a time when Jerry Brown and the rest of the Sacramento Democrats seem bent on making UC average, when even epochal decisions are often made by small, hand-picked executive groups, and when most Task Force members and assorted onlookers treated the cap and  new tier as a done deal, the Senate committees have rebelled.

We cross-post a second piece below. Published yesterday in the Daily Cal under the title, "Retirement Plan Impacts Entire Community," this article by Celeste Langan (an English professor and Berkeley Faculty Association Co-Chair) could also be called, "How Defined Benefit Pensions Support Academic Labor." In addition to offering a useful summary of the critique of the ROTF plan (paragraphs 3 and 6), Prof. Langan ties the need for real retirement security to the early-career sacrifices made by academics of all fields, as they spend the first five to fifteen of their prime earning years on reduced or nonexistent salaries in preparation for their careers. To put it another way, academics in effect subsidize society in the formation of the high grade of "human capital" represented by everyone from anti-viral molecular chemists to pre-Columbian art specialists. Those who later get tenure-track jobs have freer and more interesting work than do most Americans, but the loss of much personal income can reasonably be balanced by DB stability (and efficiency).  Prof. Langan implies that the generic hostility to pensions is undermining the university's ability to reproduce its own existence, and that in any case pensions are not something academics need to be defensive about.


What’s all the fuss over pensions about? Why should you bother reading about retirement benefits, especially when the proposed changes don’t affect current faculty and staff, whose pensions are secure? Surely there are more important concerns in this age of austerity: Aren’t we expecting the campus to announce budget cuts this month? What about lecturers, custodians and parking attendants seeking a living wage, and students faced with rising fees and food insecurity?

Here’s why it matters: Unless we resist, the UC Office of the President is prepared to institute changes to the way faculty are compensated that will accelerate the privatization of the University of California. In effect, UCOP wants to make the remuneration of faculty and staff more and more dependent on the monoculture of “the market,” thereby undermining the partial protection from economic insecurity upon which the intellectual freedom of academic work depends. Although more subtle, the proposed changes are as much an attack on the principles of academic freedom as Wisconsin’s weakening of tenure protection for its university faculty. These are strong claims, I realize, so let me explain.

Pretty much everyone agrees that the only thing wrong with the current retirement plan for UC employees — UC Retirement Plan, or UCRP — is that both the California state legislature and university stopped making payments to it for 20 years — when investment returns were so robust that regular payments seemed unnecessary — until the financial collapse of 2008. Rather than collaborate on a gradual plan to fix the consequence of these suspended payments, however, Gov. Jerry Brown and UC President Janet Napolitano have privately negotiated a deal that places blame for the problem on the structural foundation of UCRP: defined benefits. The agreement is a bad deal, because it will neither significantly reduce the unfunded liability nor yield significant savings for the university. For that reason it ought to be opposed; we should return the proffered $96 million to the state and retain our current system. But we also need to consider more carefully what’s at stake in the attack on “defined benefit” plans such as the UCRP. While there’s been much criticism of Napolitano’s agreement to the PEPRA cap of $117,000 pensionable salary, that’s not the real issue; UCOP has made clear its intention to supplement benefits for higher-earning faculty and staff. The more fundamental interest — made explicit in the FAQs and other documents about the proposed plans — is to shift “risk” to employees. Even before she had appointed her “Retirement Options Task Force,” Napolitano had announced her intention to introduce a full “defined contribution” plan.

The difference between “defined benefits” and “defined contributions” is fairly simple, although the names are confusing. The employer makes “contributions” in both cases (contributions are deferred compensation, where the employee foregoes a higher current salary for future retirement security). In “defined benefits” (DB) plans, the employer invests these contributions, and the risk is lessened by scale; “defined contributions” go directly to the employee to invest privately in IRAs. In DC plans, if you don’t invest wisely, or if the market crashes, your retirement savings are wiped out (as happened to many with DC plans in 2008). The UCRP, by contrast, uses the DB model, described as “golden handcuffs.” Long recognized as the university’s “competitive advantage” in hiring and retaining a dedicated faculty and staff, the UCRP encourages long-term employment because the percentage of pensionable salary is multiplied by years of service. You can more easily dedicate your academic life to long-term projects or to research topics not likely to yield a “commercial application” if you know your retirement benefits are secure.

UCOP defends the shift from DB to DC as “facilitating shared responsibility between UC and employees for individual retirement readiness.” That defense is galling for two reasons. First, the statement suggests that employees have not been sharing responsibility for retirement readiness, despite the obvious fact that employees contribute 7 to 8 percent of their salaries to the UCRP. But what’s almost sinful about UCOP’s moralizing tone is that it entirely ignores the enormous financial risk undertaken by scholars. In order to gain expertise in a discipline, develop an original research project and intern as teachers, graduate students postpone full-time employment for an average of six to 10 years, often taking on debt to pay fees or to supplement inadequate stipends (I remember my elder sister asking me, “Do you know I’ve made $400,000 while you’ve been in graduate school?” That was 25 years ago, and she was only making $50,000 a year). They take on this risk despite the (increasing) scarcity of tenure-track positions. Then, if they are lucky and talented enough to find employment — at the ripe age of 36, the average for assistant professors hired by the university in 2013-14 — they must move to areas such as Berkeley where housing costs are prohibitive. While home ownership has long been an alternative investment strategy for safe retirement, few assistant professors are now able to accumulate the savings that might enable a down payment on a house in or near Berkeley.

It’s clear that UCOP will not realize significant savings by capping defined benefits and paying higher salaries and supplementary contributions to offset the cap. What it would accomplish — and this is why their plan should be opposed — is the erosion of an ecosystem that has allowed research and free inquiry to flourish. Opponents often describe both tenure and defined benefits as obsolete, vestigial privileges. I’d suggest the reverse: The academic “guild” model (long apprenticeship, secure employment and retirement) offers proof that freedom is best protected when workers and thinkers are not subjected to the vagaries of the market, when they’re liberated by long-term investment strategies from the pressures of quick profit and just-in-time production.


Anonymous said...

And so the outrage over maintaining a full DB system for future hires/advances to Professor Step VI and above's income that exceeds $117,020 starts to look rather shrill. All while the median income in California is $61,320 and the typical median person has no retirement income outside of Social Security.

The faculty slogan is... "Tax the little guys with no pensions for lavish pensions for high ranking faculty!"

Meanwhile, not a peep of criticism that the fact that contributions to the existing DB system for existing employees are year after year 6% lower than what is needed to keep the system afloat.

Seems like the faculty aren't able to keep their eye on the ball.

Anonymous said...

Have you asked anyone in campus administration how they would feel about contributing beyond the current 14% of payroll, and where the money would come from? The Academic Senate has routinely urged greater contributions, starting from well before the end of the contribution holiday. The borrowing that the Regents approved, that the campuses will pay back, does make the contributions you are urging, for the next 3 years.

Chris Newfield said...

Anon 2:45: we need to fix the retirement system for the "typical median person." That means finding and voting for candidates who will advocate for the mutualization of risk as the only way regular people ever get retirement security, for the raising of SSI payments, and for the replacement of DC with DB pensions over time.

Pensions are part of total compensation, and faculty pay 8% of their salary to support the overall fund. The employer now pays 14%, with less than half of that now coming from the state through core funds. Since 2/3rds of the benefits of universities are social and non-market benefits rather than private market benefits to graduates (citing Walter McMahon here), there's no justification for zeroing out public contributions to this or that component of the operation or of employee compensation. The larger point is that we've had enough of wedge politicians trying to get middle- and lower-income people to take things away from each other in a race to the bottom.

Anonymous said...

Of course the campus and OP financial administrations don't want to make the full required 28.44% contribution to the existing UCRP... they leave the total contribution at 22% because they know eventually the missing 6.44% can be socialized to the employees, either by only paying out 80 cents on the dollar when current employees retire in 2030 or 2040, or, by raising employee contributions beyond the 8% now collected, which itself is way higher than the historical average for UCRP employee contributions.

For their innumerate advice, the financial administrators want $500,000/year salaries, with a DB portion covered by an exception to IRS policy, which they sue to keep...

I'm totally in favor of DB pensions, but salary above $117,020 is not middle and lower income. That UCRP is still not getting its required full contribution of 28.44% and the faculty associations are not focusing on that problem is the real wedge that the faculty are driving.... they faculty are focusing on a thin layer of the well compensated and neglecting the bulk of UC employees who earn less and have year after year an underfunded DB pension.

Borrowing at 3.5% from STIP doesn't cut it, sorry. The system has to make >10% per year to make that worthwhile. I have no faith that UCOP financial managers will sustain the returns to make the STIP gamble work... and many, many pension bonds through the state have resulted in bigger messes then were initially present. Also, look at Puerto Rico.

Thank goodness I started contributing 100% to my 403(b) as soon as Patricia Small was sacked, and later contributed to my 457(b). A good DB pension is way better than DC, but the UCRP hasn't been a good DB pension system since she left.

UCRP is now a horrid mess with no-one sober and careful at the helm, and the faculty with this latest kerfuffle have shown that they too don't get it....

Jerry Brown and Janet Napolitano get it. DB public pensions for income above $117,020 have no political support. Below $117,020 DB public pensions have sufficient support. With luck Brown will push this through the entire state government.

Chris Newfield said...

Anon 9:47 - you make excellent points.
It will be cheaper to fix the overall system by keeping it whole rather than continuing to divide it into tiers and multiplied saving strategies. California needs to figure out how to fix its system of retirement security for the next 50-100 years. UC needs to do it for its employees, and that includes the significant percentage of frontline academic staff--esp faculty members--who are paid more than 117,020. JB has made that a political cutoff, but it's not a philosophically or operationally useful cutoff. I don't see why UC should run extra costs (including the costs of non recruitment and various forms of uncertainty) by conceding to JB's political cutoff when it could save money by resisting it now and finding a cheaper, more holistic solution for the longterm. UC needs to create the arguments (with the understanding that DB continuation is not the purpose of the university or its great social contribution.)

Chris Newfield said...

UCLA FA blog has a sustained version of a somewhat different argument for reconsideration at http://uclafacultyassociation.blogspot.com/2016/02/stop-pension-train.html

Anonymous said...

Anon 9:47 - actually the 9 financial officers in OP who sued for a pension base above *$245,000*, make in the most recent year available an average of $643,131/year.

I don't know the status of their lawsuit asking for an average pension base of $643,131 and not $245,000. But the whole issue displays an interesting point... the financial managers who run the pension system aren't out arguing for keeping pension bases that are above PEPRA $117,020. Is that because the OP gets a special loophole allowing a special unlimited pension base for their people?

ecgrady debbi said...
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