Save Public Pensions With School Choice

Save Public Pensions With School Choice

It’s no secret that America’s 564 state and local public pension plans are in serious trouble. Joshua Rauh of Stanford’s Hoover Institution puts the cumulative underfunding at $3.4 trillion. Less widely known is that the shape of a long-term cure for this deficit has already begun to emerge — along with the unexpected opportunity finally to give parents with children in poorly performing public schools the right to pick alternatives. 

How are these things related? Consider first the underlying pattern of recently negotiated settlements to salvage financially shaky public pensions. Although union officials are reluctant to concede a permanent trend, union members have nevertheless made a self-serving concession: allow new workers to be hired with 401(k)-style contribution plans, which reduce taxpayers’ long-term pension obligations, in return for giving current and retired workers something close to what they were originally promised.

In 2011, Atlanta Mayor Kasim Reed and his city council negotiated a plan that saved $25 million in annual pension contributions, mostly through reduced pension payments for new hires. A year later, municipal officials and union representatives in Lexington, Kentucky came to a similar agreement, which was passed by the city in January of 2013.

One of the best-kept secrets about Detroit’s bankruptcy reorganization is that new hires who retire after 30 years will receive pensions costing 40 percent less in inflation-adjusted dollars than those who retired before the settlement. In total dollars, new workers contribute 10 times more to Detroit’s 2013 reorganization than do those grandfathered into defined benefit pensions.

Of course, with today’s low interest rates many pension funds are so far underwater that it’s not enough even to deny future workers the same defined benefits enjoyed by their predecessors. For instance, as part of their agreement in Lexington, active police officers and firefighters still had to give up 1 percent of their paychecks and accept lower cost-of-living increases. And with many pension trustees making riskier investments to compensate for the low return on bonds, even past contributions cannot be considered “safely in the bank.”

This is where school choice comes into play.

Widely seen by education reformers as a way to improve K-12 teaching through competition, voucher systems have a second and underappreciated advantage: They cost less than traditional public schools. And, if greatly expanded, voucher systems could free up more than enough savings to cover projected pension deficits without requiring either higher taxes or cuts to non-educational public services.

Consider that more than half a million school children are already enrolled in experimental voucher programs across the U.S. Several have already been studied to determine their fiscal impact. In 2014, Jeff Spalding of the Friedman Foundation looked at the 10 largest programs to get the most accurate picture to date of their overall financial benefit.

Spalding’s study went well beyond comparing the face value of a private school voucher to the per-pupil cost at nearby public schools. He also took into account a number of complicating factors, including the fact that students already in a private or parochial school become eligible for newly established voucher programs; that voucher amounts vary across existing school choice programs; that learning-disabled students require special services; and that the sources of public-school funding differ state to state.

Accounting for all these variables, the average annual per pupil savings for voucher programs turns out to be $3,400 — a figure that confirms the relative efficiency of school choice. But if we go one step further than Spalding and multiply his calculated savings times America’s 50.4 million schoolchildren, we find that vouchers have the potential to reduce public pension deficits at the rate of $171 billion annually.

That’s a $1 trillion reduction in less than six years.

This does not mean that public union officials will eagerly embrace the idea of funding member retirements with savings from school choice. But what they have already signaled through their acceptance of 401(k) plans for new hires is that, when pushed to the wall to preserve promised benefits for current and past workers, they’re willing to negotiate the structure of public services going forward.

Furthermore, it’s possible to expand significantly the number of voucher programs in ways that minimize the immediate disruption to most of the nation’s public-school teachers. This may be accomplished by taking advantage of the sharp employment fall off caused by retiring baby boomers and by focusing first on large cities with the worst performing schools and most distressed pension funds. 

For the present, government unions will continue to insist that both their K-12 education monopoly and past pension promises are sacrosanct. But as it becomes clear that reforming the former is the only way to guarantee the latter without risking a taxpayer backlash, one of these sacred cows will give way. The recent history of union bargaining tells us which one it will be. 

Dr. Andrews was executive director of the Yankee Institute for Public Policy from 1999 to 2009. He is the author of To Thine Own Self Be True: the Relationship between Spiritual Values and Emotional Health (Doubleday).

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