Virginia Retirement System — Trouble Ahead

Last week as I was watching the business channel, I was very interested in the comments of AIG’s head of investments about the effects of low interest rates on his firm. For those involved in life insurance and other long-term products, today’s historically low interest rates pose a significant problem. With negative rates on investment-grade bonds, insurers have no choice but to raise prices to the consumer or leave markets where bond yields are not high enough to support interest-sensitive products.

This morning’s Richmond Times Dispatch brought the issue a little closer to home. House Speaker William J. Howell wants to shift from the current structure to a self-managed system. In other words, employees would manage their own retirements and, as is the case with 403b plans or IRAs, would take their accounts with them when they shift jobs. (As a retired teacher, I receive a small pension from the Virginia Retirement System.)

It is unclear from the article how, under Howell’s proposal, the employee would fund this. Would employees receive a stipend equal to the amount that school districts currently contribute on their behalf to VRS? Or would they be totally on their own? If the latter, the state would be shifting not only market risk but the actual cost to teachers and its other employees.

Teaching has always been a relatively low wage profession. One of the unspoken deals always was, “You work for a low wage now and we will help you out in your later years.” The article leads me to conclude that Howell wants to destroy that bargain. Sure, we all want to be on our own, but attracting skilled folks to the teaching profession, which has seen a decline in real wages since the Great Recession, will be even more difficult. Funding their own retirement is a risk that few will be able to afford.

— Les Schreiber

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10 responses to “Virginia Retirement System — Trouble Ahead

  1. No one is going to buy into it. Its already hard enough to find teachers, much less at the rate they pay, the work involved and you need a college degree, training after. Forget it.

  2. Wait, wait — Les, you say Howell wants to go to a “self-managed” pension system; you didn’t say a “self-funded” system. Those are two different things. There’s nothing inherent in the words “self-managed” that implies less of a pension at the end of the road [unless you’re a poor manager of your own money]. Can you explain a little more why you say “Howell wants to destroy the longstanding unwritten bargain that ‘You work for a low wage now and we will help you out in your later years.”’?

  3. Credit the Civil Rights Act of 1964 and Herman Talmadge of Georgia. Before that time, there was a limitless supply of very bright teachers willing to work for the low pay. One of the reasons was their husband’s salaries supported the family. But the more important reason was demographics. A woman exiting college had basically three choices before 1964: Teaching, nursing, Katie Gibbs. The brightest usually chose teaching. The difference can be seen in my sister in law, ’63 at Hollins. She taught for years and ultimately wound up running the school. My wife, ’72, had other options, as did her peers. She chose lawyer.
    Now it’s time for me to issue the same tiresome disclaimers that any right thinking person has to do before all you lefties start labeling me a [insert politically incorrect moniker here]: my account is simply intended as a statement of what happened. It is not intended to pass judgment on the wisdom of same. Re: wisdom–Remember, Herman Talmadge inserted the “or sex” as an amendment to the bill, thinking that if people weren’t racist, they would at least balk at same sex bathrooms. The amendment sailed through, and so did the Civil Rights Act of 1964. Ah, yes. The best laid plans.

    Good post, Les

  4. many times in faculty meetings when the topic of compensation came up some educrat always pointed out that teachers had a noncontributory pension and many in the private sector did not have this benefit.
    In the world of finance ,self managed usually implies self funded.The article is very vague as to whether state employees or teachers would be give money to put into private IRAs .Often in the private sector corporations match employee contributions.

    • Les, good article raising important issues. In Fairfax County, we are seeing many of the younger teachers saying that they would rather have more compensation in pay and less in pensions and benefits.

      Keep in mind that FCPS has two pension plans for teachers – VRS and a separate county plan that encourages teachers to retire in their 50s and collect the equivalent of Social Security until they reach 62. No other jurisdiction in NoVA has such a pension plan. It’s absurd. Phasing out the second pension plan would free money for salaries.

      Health care benefits in Fairfax County generally require employees (County and School) to pay lower premiums, co-pays and deductibles than the Federal Government’s health care plans, which are generally regarded as stellar. Shifting to plans that matched the Feds’ in premium, co-pay and deductibles would free up more money for salaries.

      My wife is a career federal employee under FERS. She was under the old plan, but did not have enough service to stay. So she was automatically moved to FERS. Year in and year out, her savings plans tend to beat my investments, including 401Ks. It is possible to develop a defined contribution plan or, as with FERS, a combination plan that reduces taxpayer exposure to pension costs, while attracting good employees and providing them with retirement security.

  5. Crazy tickles me… anyone who thinks VRS is primarily female school teachers.. might need to rethink it…

    http://www.varetire.org/pdf/publications/2015-participating-employers.pdf

    TMT alluded to FERS which is the Federal Retirement system which transitioned from a stand-alone 100% defined benefit retirement system to a 3 tiered plan:

    FERS consists of three major components:

    The FERS annuity, a defined benefit plan,

    Mandatory participation in Social Security (most CSRS employees are not part of Social Security and do not pay taxes into the system, nor are they eligible for benefits unless they qualify under private sector employment or by being rehired and covered as CSRS (with a Social Security) Offset), and

    The Thrift Savings Plan (TSP), a defined contribution plan which operates like a 401(k)

    the defined benefit component is much smaller than the original defined benefit plan…

    you can read all about here by GOOGLING FERS and reading the wiki

    but the essential point is that the Feds got out of the 100% plan back in 1987 and from that point on – people had a 401(K) than they could manage themselves for a much, much smaller fee than if it were from the private sector.

    The govt matches contributions up to a certain amount but the real benefit is the ability of the employees to decide how much to put into it and what funds to put their money in and there are a wide variety from very aggressive stock market to very safe – almost no earnings but your money is preserved and protected – and portable.

    If the state does something LIKE FERS it will be better for everyone including the State… VRS will still be in business but managing a much smaller fund than now.

    the portability of the 401K is going to be a problem for the State I predict in terms of retaining quality personnel. They will get their entry level job and job training then they will fly the coop for greener pastures and not just those silly school teachers.. all kinds of human resources from managers to IT professionals to engineers and even UVA College professors.

    and I bet that those non-public schools that Crazy and Bacon like for teaching poor kids “better” than bad public school teachers – well that’s all going to blow up – big time… especially if they hold those voucher schools to the same accountability as public school teachers…

    FERS – and it’s TSP 401(K) component is the greatest thing as sliced bread as I bet TMT totally agrees… if Virginia employees had FERS – they’d be happy as hogs in high clover!!!

  6. Crazy tickles me… anyone who thinks VRS is primarily female school teachers.. might need to rethink it…

    http://www.varetire.org/pdf/publications/2015-participating-employers.pdf

    TMT alluded to FERS which is the Federal Retirement system which transitioned from a stand-alone 100% defined benefit retirement system to a 3 tiered plan:

    FERS consists of three major components:

    The FERS annuity, a defined benefit plan,

    Mandatory participation in Social Security (most CSRS employees are not part of Social Security and do not pay taxes into the system, nor are they eligible for benefits unless they qualify under private sector employment or by being rehired and covered as CSRS (with a Social Security) Offset), and

    The Thrift Savings Plan (TSP), a defined contribution plan which operates like a 401(k)

    the defined benefit component is much smaller than the original defined benefit plan…

    you can read all about here by GOOGLING FERS and reading the wiki

    but the essential point is that the Feds got out of the 100% plan back in 1987 and from that point on – people had a 401(K) than they could manage themselves for a much, much smaller fee than if it were from the private sector.

    The govt matches contributions up to a certain amount but the real benefit is the ability of the employees to decide how much to put into it and what funds to put their money in and there are a wide variety from very aggressive stock market to very safe – almost no earnings but your money is preserved and protected – and portable.

    If the state does something LIKE FERS it will be better for everyone including the State… VRS will still be in business but managing a much smaller fund than now.

    the portability of the 401K is going to be a problem for the State I predict in terms of retaining quality personnel. They will get their entry level job and job training then they will fly the coop for greener pastures and not just those silly school teachers.. all kinds of human resources from managers to IT professionals to engineers and even UVA College professors.

    and I bet that those non-public schools that Crazy and Bacon like for teaching poor kids “better” than bad public school teachers – well that’s all going to blow up – big time… especially if they hold those voucher schools to the same accountability as public school teachers…

    FERS – and it’s TSP 401(K) component is the greatest thing since sliced bread and I bet TMT totally agrees… if Virginia employees had FERS – they’d be happy as hogs in high clover, VRS much safer and agency bosses tearing their hair out trying to keep their good people.

  7. Got any FEMALE commenters here? Or just older white guys?

  8. re: ” I was very interested in the comments of AIG’s head of investments about the effects of low interest rates on his firm. For those involved in life insurance and other long-term products, today’s historically low interest rates pose a significant problem. ”

    Ah yes.. the poor old private sector getting jerked around by the govt and it’s wrongheaded policies…

    well.. I wonder if Jim will talk about this:

    The award-winning CBS News television program, 60 Minutes, aired a disturbing story this week that should be cause for concern for all Americans who own life insurance policies. The story, reported by CBS News Correspondent Lesley Stahl, shone a national spotlight on calculated efforts by life insurance companies in several states to avoid paying life insurance claims.

    The strategy is made possible by the fact that many people purchase life insurance policies when they are young adults and toss the policies in desk drawers, while continuing to pay the premiums year after year. Often times, the beneficiaries of the policies are unaware they even exist, with the insured individuals relying on the companies who sold the policies to make good on paying out the death benefits to their beneficiaries when they pass away.

    Insurance regulators in states such as Florida, Oklahoma and West Virginia and other states have launched investigations into this shameful practice by insurers and are pursuing consumer protections that would require insurance companies to be more responsive about paying out death benefits on policies. To date, 25 of the nation’s biggest life insurance companies have agreed to pay more than $7.5 billion in back death benefits. However, Stahl reported that about 35 insurance companies have not settled and remain under investigation for not paying when the beneficiary is unaware there was a policy.”

  9. In Fairfax County, a teacher working 30 years receives a pension, VRS plus ERFC, of approximately 75% of her peak salary ($110,000). When Social Security starts, she receives a total of 100% of her peak salary — for the rest of her life. Legacy ERFC stopped when Social Security started. ERFC 2001, the current system, never stops. There are typically 20,000 applicants for 1,000 jobs in the Fairfax County school system. The county was, but is no longer, 200 short of teachers when the state suddenly required science and math teachers to have majored in science or math.

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