Data and Research July 1, 2021

Public Retirement Benefits Not What They Used to Be

Changes to public pensions following the Great Recession make them less than adequate for most employees now, and some of the best public plans are DC plans, a study suggests.

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Defined benefit (DB) pension plans are a valuable benefit for employees—offering the option of guaranteed retirement income that is lacking in most defined contribution (DC) plans.

Some private-sector employees have been envious of the pension benefits provided to public-sector employees. Over the years some outsiders have even argued that public pensions are too generous, perhaps without understanding that many public employees are required to put a significant percentage of their own pay into the plans. And there has been misunderstanding about the amount of support public pensions get from taxpayers.

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A report from the National Institute on Retirement Security (NIRS) that aimed to examine Americans’ views on public retirement plans says state and local pensions are funded from three sources: employer contributions, employee contributions and investment earnings. Between 1993 and 2018, about 25% of public pension fund receipts came from employer contributions, 11% from employee contributions, and about 64% from investment earnings. “This means that earnings on investments historically have made up the bulk of pension fund receipts, even during two market downturns, and taxpayers are funding only a portion of these benefits,” the NIRS says.

The NIRS also found more widespread support for public pensions than in the past. “The COVID-19 pandemic has shined a light on the critical role that qualified, experienced state and local workers play in our lives,” says Dan Doonan, NIRS executive director and report co-author. “From health care workers to first responders to teachers, these employees have worked tirelessly and taken immense risks this past year.”

Nearly three-fourths (72%) of respondents to an NIRS survey agree that state and local employees should receive pensions because they help finance part of the cost by contributing money from each paycheck. Sixty-nine percent say public school teachers deserve a pension to compensate for their lower pay. Similarly, Americans say high-risk jobs are another reason that public employees should receive a pension, with 76% in agreement.

In addition, more than three-fourths (77%) of Americans say all workers, not just state and local employees, should have access to a pension.

The 2008 global market crash reduced public pension fund asset values and, since then, nearly every state has enacted reforms to its pension plans to ensure their long-term sustainability, including by implementing benefit reductions and increased employee contributions.

Meanwhile, a study report from the Equable Institute suggests the majority of recently hired public employees are not provided with an adequate path to retirement income security. “While the value of pension benefits can be quite high for full-career workers (those who work longer than 20 years), the reality is that very few people will actually get these benefits, leaving many workers unprepared for their future financial demands,” the report says.

Only 11 out of all 335 state retirement plans offered to new members are serving what Equable calls “short-term workers”—those who will leave before 10 years of service—well. This includes pension, defined contribution, guaranteed return and hybrid plans. Equable says individuals working 10 years or fewer in the same plan make up about half of the public sector workforce at any given time.

In addition, Equable found only 24 out of 220 state pension plans are providing sufficient benefits to what it calls “medium-term workers”—those who serve between 10 and 20 years.

The study found that “full-career workers” are served well by all plan types, including pension, DC, guaranteed return and hybrid plans. However, Equable found that a DC plan and a hybrid plan serve all members well.

The study found that some of the best-performing plans are public DC plans for full-career workers. “A key feature of these plans is that they have relatively high contribution rates, such as South Carolina’s 14% of total payroll contributions for state, local and public school workers,” the report says.

On the other hand, guaranteed return and hybrid plans that combine elements of guarantees and individual accounts perform worse on average than straightforward pensions and DC plans, the study suggests. “They provide trade-offs for members who want to balance risk and agency, so they may still be optimal for certain workers whose risk tolerance is willing to accept slightly lower valued benefits,” the report says.

Compliance July 1, 2021

Employees of Religiously Affiliated Organizations Qualify for Student Loan Forgiveness Program

Employers can educate employees about new regulations issued in response to a Supreme Court decision.

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In response to the U.S. Supreme Court decision in Trinity Lutheran Church of Columbia Inc. v. Comer, the Department of Education has amended regulations regarding the eligibility of faith-based entities to participate in the Federal Student Aid programs authorized under Title IV of the Higher Education Act (HEA) of 1965 and the eligibility of students to obtain certain benefits under those programs.

Among other things, this means that starting July 1, employees at nonprofit organizations affiliated with religious entities qualify for the federal public service loan forgiveness (PSLF) program.

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Some employers offering student loan repayment benefits educate employees about loan forgiveness programs or connect them with someone who can help. To aid nonprofit employers in their efforts , together with Savi, TIAA recently launched a program that helps employees reduce their monthly payments and qualify over time for the PSLF program.

The Supreme Court case referenced in the Department of Education’s new regulations involved a licensed preschool and daycare center that was initially opened as a nonprofit corporation but merged with Trinity Lutheran Church of Columbia in 1985. The preschool applied for a Playground Scrap Tire Surface Material Grant offered by the Missouri Department of Natural Resources but was denied because of a section of the Missouri Constitution that states, “no money shall ever be taken from the public treasury, directly or indirectly, in aid of any church, section or denomination of religion.”

Trinity sued, arguing that the denial of its application violated the equal protection clause of the 14th Amendment as well as the First Amendment’s protections of freedom of religion and speech, according to LexisNexis.

Lower courts ruled in favor of the Missouri Department of Natural Resources. However, the Supreme Court held that the department violated a church’s rights under the free exercise clause of the First Amendment. The high court said the department’s policy discriminated against otherwise eligible recipients by disqualifying them from a public benefit solely because of their religious character and, in doing so, imposed a penalty on the free exercise of religion.

Among other things, the Department of Education’s new regulations:

  • Restore the ability of members of religious orders, who also are pursuing courses of study at institutions of higher education, to participate in the Title IV programs by eliminating regulatory provisions that treat members of religious orders as having no financial need in certain circumstances;
  • Allow certain borrowers, who serve as full-time volunteers in tax-exempt organizations and give religious instruction, conduct worship service, proselytize or fundraise to support religious activities as part of their official duties, to defer repayment of Federal Perkins Loans, National Direct Student Loans (NDSLs) and Federal Family Education Loan Program (FFEL) loans; and
  • Provide an interpretation of the PSLF regulations that permits borrowers who work for employers that engage in religious instruction, worship services or proselytizing to qualify for PSLF.

In a “Student Loan Tip Sheet,” Savi says, “Given how PSLF works, student loan borrowers will be able to retroactively count previous years of employment for religious organizations toward the service requirement for the program—meaning eligible borrowers could get forgiveness on their loans in a matter of weeks.”

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