The Brookings Institution is attacking public pensions, but rather than taking the usual fiscal-responsibility angle, a new paper argues that defined-benefit pension funds systematically offer women fewer benefits for the same work as men.There are a number of reasons for this, but the most important one is that women tend to take more time off over the course of their careers, especially to care for children. The structure of most plans makes it difficult for women to catch up once they resume work, even if they eventually work for the same number of years. The exact difference varies by age of retirement, but at age 55, the average woman makes only 85 cents to the man’s dollar from her pension:
Why do teacher pensions appear to fail the equal pay for equal work test? The main reason is that women are more likely to spend time out of the workforce than men, and defined-benefit pension plans like the one in Ohio tend to punish teachers who fail to meet specific targets, such as 30 years of service. In my dataset, the average man was working for 96 percent of the included years, as compared to 75 percent for the average woman. Teachers who leave the workforce often cannot make up the lost benefits because benefit increases from additional years of work are offset by fewer years of benefit receipt. […]Consider two hypothetical women: one worked every year beginning at age 25 and the other worked most years but spent seven years out of the labor force. If both women retire at age 55, the first will receive a pension benefit worth 40 percent of her total earnings, whereas the second’s will only be worth 26 percent (equivalent to 65 cents on the dollar). The second woman can never catch up to the first—the best she can do is work until age 61, when her benefit rate tops out at 32 percent of total earnings. It is hard to argue that these two teachers received equal pay for equal work.
This study points to a real problem, but what’s most interesting is that defined-benefit pensions actually do a bad job for all employees, male and female, when it comes to providing equal benefits for equal work. People who change jobs are penalized, and other arcane rules shower extra benefits on some while short-changing others.Equality minded pension reformers ought to take a look at defined-contribution systems. One of the key reasons for the odd gaps in many current plans is that defined-benefit pensions are not based directly on the amount that employer and employee contribute to the plan, which means that two workers who contribute for the same number of years may receive different payouts, depending on specifics of the payment formula like whether or not they took time off. In a defined-contribution plan, benefits are tied directly to the amount contributed. As Education Next notes:
Public school teachers are almost universally covered by traditional defined benefit (DB) pension systems. The employer has an obligation to provide a regular retirement check to employees upon their retirement, based on a legislatively determined formula (see sidebar). The key characteristic of DB systems is that the benefit is not tied to the contributions that individual teachers and employers make to the pension fund. That is what distinguishes DB from defined contribution (DC) plans, known more popularly as 401(k)-type systems. […]The underlying problem with DB systems is their distortion of retirement incentives, stemming from the broken link between benefits and contributions. DC systems and cash balance (CB) plans restore that link.
Moving public pension systems to a defined-contribution model would create a safe, sustainable, transparent, and fair pension system, for women and men alike. This is a reform whose time has come, and we hope more cities and states adopt it.