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At a time when tenure track jobs are drying up and faculty pay is mostly stagnant, some fear the latest threat to the professoriate will actually be realized years from now. As budgets tighten in states across the country, a number of legislatures are re-evaluating the popular pension plans that have been a key benefit for faculty.
Pension cuts for future faculty have already been approved in Illinois, where recent legislation raised retirement ages and reduced the maximum payouts available to future program participants.
“The de-professionalization of the faculty is what fundamentally worries me,” said Cary Nelson, an English professor at the University of Illinois at Urbana-Champaign and national president of the American Association of University Professors. “It’s part of the same move of relying on contingent faculty. It’s one more way in which that system is put at risk.”
Under Illinois’s former system, faculty members at all public institutions and other state workers could retire between the ages of 55 to 62 with full benefits, provided they had worked at least 8 to 10 years, depending on their age. The new law will raise the eligible age for full benefits to 67 with 10 years of service. The change means new faculty retiring before reaching the age of 67 will see benefits reduced by 6 percent a year, according to the Center for Tax and Budget Accountability, a bipartisan, nonprofit organization that studies public spending in Illinois
The changes in Illinois were designed to address a $77.8 billion unfunded pension liability, but critics charge these reforms won’t do anything to fill that hole. The new law only reduces expenditures going forward; it doesn’t necessarily eat into the debt already on the books.
While there’s no question the changes will save money at some point, lawmakers approved the plan before a thorough actuarial analysis could be completed to calculate savings. Legislators have said they expect $100 billion in savings over the next few decades, but that “was just kind of a back of the envelope estimate,” said Fred Giertz, a member of the State University Retirement System’s Board of Trustees.
“It was just a lot of B.S. on their part,” Giertz said of the estimates.
Absent a more thorough analysis, Giertz said he and other experts still can’t definitively say what the difference in pension payouts would be for an employee under the old and new plans who had the same salaries and years of experience.
In New Jersey, college officials are similarly scrambling to figure out exactly how a recent change in pension benefits will affect them. Gov. Chris Christie signed into law a series of pension-cutting measures in late March, but a Rutgers University official said last week they’re still digesting the details.
“We are in the process of working with the state to determine the specific impacts of this legislation on Rutgers University,” said Greg Trevor, a spokesman for Rutgers.
To the extent that there is an impact, most Rutgers employees won’t feel it. Of the approximately 10,000 employees at the university, only about 35 percent are in the Public Employees Retirement System, the state’s plan. Most faculty at Rutgers are invested in a defined contribution plan, administered through TIAA-CREF and other carriers, called the Alternative Benefit Program.
What is known about the changes to Illinois’s program is troubling, says Giertz, a professor of economics and member of the Institute of Government and Public Affairs at Urbana-Champaign. The new plan also calculates cost of living adjustments on simple interest instead of compound interest. Moreover, benefits will be based on the average salary of the highest eight consecutive years, as opposed to four.
The highest wage earners will be most impacted by a new pensionable salary cap, which will be placed at $106,800, the same as the current cap on Social Security.
“It’s going to make a big difference for highly compensated people, especially at universities,” Giertz said.
And there's the rub. In the court of public opinion today, there's precious little sympathy for those at the top of the salary pyramid in any industry, and academe is no exception. Lawmakers opposing the status quo of pension plans frequently label them “Cadillac” plans, suggesting they are overly generous. While that’s debatable, it is true that defined benefit plans in states like Illinois are designed to pay out a promised amount regardless of the performance of the stock market or the state of economy. Defined contribution plans, wherein employees and employers typically pay in a certain percentage of salary, are only as solvent as the market allows.
To participate in the plan, Illinois faculty forgo Social Security and pay 8 percent of their salary into the pension fund, and they would continue to do so under the new system. But it’s still sometimes difficult to make the case that reducing the payouts for future employees is such a bad thing in the current economy. More than 3,500 state workers have annual pensions of more than $100,000, and the highest pension is $391,000 a year, according to National Taxpayers United of Illinois, a nonprofit tax watchdog.
The new law has also stirred up popular support through provisions that would curb abuses of the pension system. The law suspends the pension of any retiree who goes to work for another government agency, thereby curbing the controversial practice of “double-dipping.”
Jane Wellman, executive director of the Delta Project on Postsecondary Education Costs, Productivity and Accountability, said the tough conversations about pension plans in public universities aren’t going away any time soon. A number of benefit plans reduced retirement ages or increased benefits when market returns were good, and now the “chickens are coming home to roost," she said.
“If state funds are not going up --- and they are not – that means we’re going to be charging students more just to pay for the benefit packages,” Wellman said. “It’s not sustainable. These are very expensive benefit programs. Just to keep the cost from going up further will require a lot more money.”
The retirement programs are but a piece of the entitlements public institutions are struggling to retain, she added. Health care benefits may be even more vulnerable, because – unlike pension plans – universities have greater flexibility to change them for existing employees.
Universities with defined contribution plans have also been reducing benefits. About 13 percent of colleges reduced contributions to retirement plans last year by at least 0.5 percentage points, an AAUP survey found.
California Plans Under Scrutiny
Unsurprisingly, the crippled economy in California has generated renewed debate about whether the state can sustain its three largest pension programs, which cover the University of California, California State University and the California Community College systems.
Gov. Arnold Schwarzenegger has backed a controversial plan to rein in public pension plans, calling them “the single biggest threat to our fiscal health.” Under the proposal, California State and community college employees, among others, would need to be 65 years old -- up from 55 -- to be eligible for benefits.
Under fire for years from fiscal watchdogs, California’s pension plans received renewed attention last month when an independent study, conducted by graduate students at Stanford University, found a shortfall of more than a half-trillion dollars across the state’s three biggest plans. The study has been criticized by many, including Jack Ehnes, chief executive officer of the California State Teachers’ Retirement System (Calstrs), which covers the community college system. Ehnes recently told the Calstrs board that "most people would give [this study] a letter grade of 'F' for quality" but "since it bears the brand of Stanford, it clearly ripples out there quite a bit."
The report was also criticized by Joseph A. Dear, chief investment officer of the California Public Employees’ Retirement System (CalPERS), which covers California State Faculty. In a recent San Francisco Chronicle column, Dear conceded the program is only funded to cover about 60 percent of its liabilities as of now, but noted that CalPERS’s investments have already recovered about $50 billion over the last year. When looked at over the span of a 20-year period – including the past two years of the recession – average annual returns for the program are 7.9 percent, Dear said.
Jonathan Karpf, vice president for lecturers in the California Faculty Association, said the attacks on pension programs in his state amount to “scapegoating." The state's fiscal problems are vast, but criticizing a pension plan that has had strong returns over the long run doesn't make sense, Karpf said.
Under previously proposed ballot initiatives – none of which have garnered enough signatures to go before voters – new eligibility standards would have denied lecturers access to CalPERS, because they are not considered “full-time” employees. That would be a departure from the current system, which allows lecturers to accumulate enough teaching credits to enter the program.
“Nobody in their right mind will consider going into public higher education [if these initiatives pass],” said Karpf, who has been a lecturer of biological anthropology at San Jose State University since 1987. “What we’re going to see is a brain drain.”
The University of California, which has its own retirement program, is also grappling with how to address pension shortfalls. The university took the first steps to that end in mid-April, when it began paying 4 percent of each employee’s salary into the plan. Employees are also now steering a 2 percent contribution into the pool, instead of placing that money into personal investment plans as they had previously.
The University of California and its employees haven’t paid into the retirement plan for about 20 years, in large part because the economic booms that preceded the recession created a surplus in the pool. The university dipped into those funds to offer generous retirement incentives, however, and in the post-recession environment the fund looks quite different. The university’s unfunded post-retirement liability is $1.9 billion, and it’s expected to grow to $18 billion by 2013, according to the Commission on the Future of the University’s Funding Strategies Working Group.
Jim Chalfant, a member of the university’s Task Force on Investment and Retirement, said the retirement plan has been a source of concern for some time.
“The Academic Senate has been watching this for several years and saying we need to restart contributions,” said Chalfant, a professor in the Davis campus’s department of agricultural and resource economics.
It’s debatable, however, whether the university has acted quickly and forcefully enough to address longstanding concerns about the stability of the retirement pool. Wellman, of the Delta Cost Project, said it was notable that the University of California’s Commission on the Future didn’t even propose solutions to the pension problem in its first report, noting that a separate task force is investigating it. All other conversations about the university’s future, however, are moot if a projected $18 billion funding shortfall in the retirement plan isn’t dealt with, Wellman said.
“If they don’t take care of that problem, they don’t have a University of California,” she said. “And they are acting like this is an 'oh by the way.' ”
There have, however, been some concrete proposals put forward. In addition to a gradual ramping up of contributions, the Academic Senate has suggested the university issue bonds to cover the system’s state-funded employees, who comprise about one-third of the university’s workforce. In so doing, the theory goes, the sponsors of other university employees – supported by non-state sources, including auxiliary enterprises, the medical center and federal grants – would be compelled to cover their share as well.
The Senate’s plan is no doubt subject to criticism, since it essentially endorses borrowing more money to deal with deficits. On the other hand, the Senate has argued that servicing the debt will be less expensive than forgoing the contributions non-state sources would provide if the university borrowed to meet its pension obligations.
“I personally view this as at a minimum a short term solution that jump starts contributions from the other funding sources,” Chalfant said. “But it’s a fair point: You can’t borrow forever.”
