Susan Pendergrass speaks with Andrew G. Biggs, senior fellow at the American Enterprise Institute, about the Social Security trustees’ latest report and what it means for the program’s future. They discuss the projected 2032 insolvency of the retirement trust fund, why the trustees’ birth rate assumptions may be too optimistic, the proposed Moreno-Warren plan to eliminate the payroll tax ceiling, the Cassidy-Kaine plan, and why pension experts oppose it, what would actually happen if the trust fund ran out, and more.

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Episode Transcript

Susan Pendergrass (00:00):
I feel fortunate to have grabbed some of your time. Andrew Biggs from the American Enterprise Institute, I appreciate you coming on to talk to us. Social security has been nothing but in the news recently, and you know more than anyone else. So thank you for taking the time.

Andrew Biggs (00:14):
That’s why I’m so cheerful. The more you know about Social Security, the happier you are. But thanks for having me, Susan. It has been busy. I’m really happy to be with you today.

Susan Pendergrass (00:16):
I’m in my sixties. I see something about Social Security running out of money and I pay attention. So just to bring us all up to speed: in the last week, there was a news flash that Social Security is going to run out of money sooner. What does it really mean?

Andrew Biggs (00:39):
Every year the Social Security trustees, which is mostly members of the cabinet, the Secretary of the Treasury, the Social Security Commissioner, and so on, come out with a report projecting the program’s financial health, both in the short term and the long term. That happens every year, and it’s been getting worse every year. In this year’s report, they projected that the retirement trust fund will go insolvent, or run out of money, in 2032. They also projected a significantly larger long-term funding gap in the years thereafter, and this is worth explaining.

When the trust fund runs out, it doesn’t mean there’s zero money to pay benefits. As long as we’re paying a trillion dollars a year in payroll taxes, there will be money to pay benefits. But when the trust fund runs out, it means benefits will be cut, and their projection is somewhere around 22%. The size of that long-term funding gap dictates how big the cuts are going to be in the years thereafter. The trustees lowered their projections for birth rates, and they found that the One Big Beautiful Bill has worsened Social Security’s finances. A variety of things made this long-term funding gap worse. It’s really hard to paint a happy picture. The trust fund can be running out in about six years, and the funding gap and the benefit cuts in years thereafter are going to be larger. It’s a sobering picture.

Susan Pendergrass (02:16):
I’m not trying to pile on, but I think I saw that they extended the time when they expect birth rates to bounce back. Is that true? Because I have not seen anything anywhere, and I’ve spoken to some demographers, to suggest birth rates are ever going to bounce back.

Andrew Biggs (02:35):
Here’s the interesting thing. If you look at the Congressional Budget Office or the US Census Bureau, right now the fertility rate is about 1.6 children per woman on average, and both the CBO and the Census project that’s going to remain pretty much steady, declining a little bit over coming decades. Social Security had a very different picture. As of last year, they thought the birth rate, which is 1.6 now, was going to immediately start rising and go back up to 1.9 children per woman in the next several decades. That makes Social Security’s finances better. More kids being born means more people paying into the system. What they did in this year’s report is moderate a bit on fertility. They said, okay, it’s not going to rise back to 1.9, it’ll rise back to 1.75. So they are still over-optimistic. I’ve talked to some demographers and economists who’ve really focused on the birth rate, and they described the trustees’ assumptions as, quote, fanciful, meaning they just weren’t plausible. Now they’re somewhat more plausible, but they still tend

Susan Pendergrass (03:32):
Okay.

Andrew Biggs (03:48):
to be more optimistic than other agencies. And to me, frankly, this is a concern. You really want the people who are the scorekeepers, the umpires, to be playing it as straight as they possibly can. We know that these guesses are going to be wrong because this stuff is impossible to predict with certainty, but most demographers think the best guess is we’ll stay around 1.6 going forward. You’ve seen a decline, and a good predictor of birth rates is religiosity, the level of religious belief in a country. The US has typically been much more religious than Western Europe, and that’s played into fertility. There has been a big decline in religious belief, particularly among younger Americans, along with all the other pessimism you see among younger people. When people are pessimistic, they tend not to have a lot of kids. So the best guess is we’re going to stay about where we are.

I wrote something the other day saying the bad news in this trustees report is even worse than last year’s, but it could have been even worse. They project a long-term funding gap above 4.4 percent of payroll. What that means is if you took the 12.4% payroll tax today and raised it immediately and permanently by 4.4 percentage points, from 12.4 to 16.8, that would in theory keep the trust fund solvent for 75 years. But a better guess would be a funding gap of around 4.8 to 5 percent. This is real money. For years, people on the left have said, well, okay, we know Social Security has a solvency problem, but it’s a manageable issue. They were saying that when the funding gap was 2% of payroll. Now you’re looking at four to five percent. That’s a lot of money, at a time when a lot of other things are making claims on the budget. We have some difficult choices to make and we really have to start thinking hard about this.

Susan Pendergrass (06:09):
Okay, so what about this idea that’s been floated in the last week of getting rid of the payroll cap? First of all, explain the payroll cap, and then this idea of getting rid of it.

Andrew Biggs (06:17):
Sure. Social Security has a 12.4% payroll tax, half paid by you and half paid by your employer. That applies only to wages up to $184,500. That’s called the payroll tax ceiling, or the tax max. That dollar figure goes up every year, but this year it’s $184,000. You only pay taxes on those wages, and you also earn benefits only on those wages. People say, well, Bill Gates doesn’t pay more taxes than that. But he doesn’t earn any benefits either. So you’re capping both the taxes and the benefits.

To fast forward a little bit: there’s an op-ed in the Washington Post this week from Senator Bernie Moreno, a Republican from Ohio, and Elizabeth Warren, a Democrat from Massachusetts. They say it’s just common sense to eliminate that cap and tax all earnings for Social Security. The interesting thing is how uncommon that would actually be. Our payroll tax ceiling is $184,000. Almost every other country has a ceiling on their payroll taxes for their pension system, and in almost every other country that ceiling is lower. In Canada, you only pay taxes and earn benefits up to around $60,000 in earnings. In the UK it’s about $70,000. In Germany it’s about $70,000. We are already an outlier for how high up the income ladder we tax people. To eliminate the cap entirely is a big deal. It’s effectively a 12 percentage point increase in the top marginal tax rate. I pulled an example of somebody living in New York City. A high-income person already pays 37% in federal income taxes, plus regular Medicare taxes, the additional Medicare tax, state taxes, and city taxes. If you add another 12 percentage points on top of that, their marginal tax rate would be in the mid-60s. And that’s before we’ve fixed Medicare or done anything else. The federal budget is still broke, and you’ve taxed these people as high as you possibly can. So these things that look like common sense, why don’t we just tax everybody,

Susan Pendergrass (08:37):
Right, right.

Andrew Biggs (08:46):
look, there are reasons for that.

Susan Pendergrass (08:49):
And were they suggesting that if I make $300,000 and I pay my 6.2 percent, totaling 12.4 with my employer, on my entire salary, that my Social Security benefit one day would be higher? Are they talking about capping the benefit or just getting rid of the cap on contributions?

Andrew Biggs (09:06):
They haven’t been very specific. They say Social Security would continue to be an earned benefit, which kind of implies you would continue to earn benefits on the additional taxes you would pay. Let’s say if we uncap the payroll tax and base your taxes on your total earnings, you’d also base your benefits on your total earnings. What you get then is, okay, you’re getting all this money from people in the short term, but you have to pay them higher benefits in the long term. That offsets some of the savings. And this morning I was running some numbers looking back to the 1970s. We had a huge run-up in benefit levels from Social Security in the 1970s. The benefit formula we have today is not the one FDR invented. It really happened in the 1970s, where they jacked up benefits in a really foolish way, and then to help pay for it, they increased the payroll tax ceiling. Right now you pay taxes on earnings up to $180,000. If we had just kept the tax max from 1970 and indexed it to wages, it would have been only $95,000. So they essentially doubled the wages on which you pay Social Security taxes. But what happens is they also doubled the wages on which people earn benefits. I’ve highlighted the point that if you have a high-income

Susan Pendergrass (10:38):
Mm-hmm.

Andrew Biggs (10:43):
couple retiring today, they could get almost $100,000 in total benefits, which is absurd. There’s no reason a government program should be paying anybody that amount. If you want that kind of income in retirement, you save more in your 401k. It’s better for you, better for the economy. But it was a result of this short-term step they took in the 70s. They said, hey, we raised benefits too high, let’s jack up the tax max. And they didn’t worry about the fact that in the future you’d have to pay benefits on that. Well, the future is today.

Susan Pendergrass (11:05):
Okay.

Andrew Biggs (11:13):
Now we’re broke again, we need extra money again, and these guys say, well let’s just jack up the tax max. But then you’ll pay extra benefits in the future. It becomes this chasing-your-tail kind of thing.

Susan Pendergrass (11:16):
Yeah. Yeah.

Andrew Biggs (11:25):
And the problem when you do it is there’s no country on earth paying $100,000 a year from a social insurance program, except for us. And the reason we do is these stupid historical decisions. If you’ve got this high-income couple in the US retiring today, they can get almost $100,000 from Social Security. If they lived in Canada, they’d get like $35,000. And that’s perfectly fine. Nobody’s starving to death in Canada in retirement. They just save more on their own.

Susan Pendergrass (11:35):
I’ll say.

Andrew Biggs (11:55):
The irony is that we think of ourselves as a free-market, small-government country, and our Social Security program is enormous, primarily because we’re paying benefits to people that other countries say, yeah, we don’t need to pay benefits to these guys.

Susan Pendergrass (12:11):
And yet people say, I put my money in, I get my money out.

Andrew Biggs (12:14):
Yeah, and I understand it. When I say we shouldn’t be paying $100,000 a year to a high-income couple, you get the email saying, well, I paid in. And if you paid in, you feel you have this moral claim on benefits. The problem is Social Security is still broke. We still need higher taxes or lower benefits. The idea that you’re just going to get your full benefits with the taxes you paid doesn’t work because the system can’t afford to do it. So you have to make the choice: do I want to pay higher taxes or get lower benefits? I’ve got to pick my poison. Most high-income people would prefer to get lower benefits. They care more about their taxes than their benefits. But people are still living in this dream world where this system, which is $30 trillion in the hole, is somehow going to pay them everything they’ve been promised and just screw somebody else. Everybody thinks they’re the guy who’s going to get everything and somebody else is going to get screwed.

Susan Pendergrass (13:14):
Yeah. I definitely hear people saying today, maybe I should go ahead and take it early and then I’ll get grandfathered in and my benefits won’t get lowered.

Andrew Biggs (13:26):
It probably won’t make a difference. In general, the Social Security benefit formula works based on your birth cohort, the year in which you’re born, not really the year in which you claim benefits. And people who are going to do Social Security reform understand the incentives. They don’t want to make it easy for people to game the system. So Social Security reform will probably work itself out in such a way that

Susan Pendergrass (13:42):
Right.

Andrew Biggs (14:03):
you can’t get some big advantage by claiming early. I could think of some conceivable possibilities, but I still would not encourage people to claim early.

Susan Pendergrass (14:14):
Okay, I want to talk about two more things I read in the last week. One was a letter from Tim Kaine about his idea with Senator Cassidy. What’s that idea for fixing it?

Andrew Biggs (14:24):
The interesting thing is people say Social Security reform has to be bipartisan. So we have two bipartisan ideas. We have Moreno and Elizabeth Warren, a Republican and a Democrat. They’ve got one idea, eliminating the payroll tax ceiling.

Susan Pendergrass (14:39):
Third rail.

Andrew Biggs (14:49):
Cassidy, a Republican from Louisiana, and Tim Kaine, a Democrat from Virginia, they’ve got a bipartisan plan. And guess what? Their plan is also terrible. If there’s any lesson from this, it’s that bipartisan doesn’t mean good.

Susan Pendergrass (15:00):
Bipartisanly terrible.

Andrew Biggs (15:04):
Yeah. Look, ultimately Social Security reform is going to have to be bipartisan, given the way the political system works. On the other hand, there is some lesson that if both Republicans and Democrats can agree on something, it might be a terrible idea. With Cassidy and Kaine, they are explicitly, and Cassidy said this, solving a political problem. The political problem is that neither Republicans nor Democrats want to vote for either tax increases or benefit cuts. You’d think Democrats want to raise your taxes and Republicans want to cut your benefits. The reality is they don’t want to do either of those things because they realize both are politically unpopular, which is why we’ve gone 40 years literally doing nothing. So their solution is that we don’t have to make these difficult votes. Instead, the federal government will borrow about $2 trillion, invest that money

Susan Pendergrass (16:02):
Tough.

Andrew Biggs (16:04):
in stocks and private equity, high-risk, high-return stuff. Then they claim they’re going to hold this fund for 75 years so it can build up value. In the meantime, when Social Security’s trust fund runs out in 2032, the federal government will borrow against the assumed gains on this investment fund.

Susan Pendergrass (16:06):
Right. Mm-hmm.

Andrew Biggs (16:29):
They say the borrowing will be at a lower rate because it’s the federal government. And they say after 75 years, all the gains in this investment fund will pay back all the borrowing and we’re all good. And let me count the ways there are problems with that. If you work at the state level,

Susan Pendergrass (16:45):
It’s just kicking the can.

Andrew Biggs (16:52):
state-based think tanks almost know more about this than federal people. A lot of underfunded state pension systems do things called pension obligation bonds. Their pension system is underfunded, they don’t want to raise contributions or cut benefits, so they borrow and invest in the stock market and hope it works. The pension obligation bond is the hallmark of a poorly funded, poorly run pension system. Think New Jersey, Illinois, things like that.

Susan Pendergrass (17:21):
Yeah.

Andrew Biggs (17:23):
There’s a national group of state budget officers that has come out and basically said as an institution, don’t do this. Borrowing for your pension is a bad idea. So it really is fitting for the times that the Cassidy-Kaine plan says, let’s take this worst idea from state and local government

Susan Pendergrass (17:45):
Yeah.

Andrew Biggs (17:47):
employee pensions, which has been condemned as bad practice, and put it on steroids and do that for Social Security. And what it really gets to is they just don’t understand the finances of it. And to be frank, they won’t listen. They have talked to every pension expert I know, and this Social Security world is pretty small. We all know each other on both sides. We may not agree on everything. Literally every pension expert I know says this is a terrible idea.

Susan Pendergrass (17:54):
Yeah.

Andrew Biggs (18:17):
But their political considerations are more important than policy, and that’s the problem with all of them.

Susan Pendergrass (18:24):
I mean, it feels free. They’re basically saying it’s like a timeshare. It just feels free right now. We just borrow the money. Okay, so

Andrew Biggs (18:31):
It’s been pointed out to them that if you can fund Social Security this way, you could fund the entire federal government this way and never collect any taxes. At one point Senator Cassidy was quoted in a newspaper article saying, well, yeah, sure, in theory you could. And I’m like, if something implies there’s a free money machine, maybe you need to question your assumptions.

Susan Pendergrass (18:38):
Sure. Okay.

Andrew Biggs (18:54):
I could give you a whole variety of reasons why this doesn’t work, but one macro point that’s come to me: I’ve been doing Social Security for a long time. I worked in the Bush administration in 2005 when they tried and failed to do Social Security reform. One of the problems we face today is that your elected officials understand Social Security policy much less well than they did 20 years ago. They just don’t understand how the system works. Going back to the Moreno-Warren idea of applying the payroll tax to all earnings,

Susan Pendergrass (19:22):
Yeah.

Andrew Biggs (19:37):
okay, you’re adding 12 percentage points to your top tax rate. There’s a reason Sweden and France and others don’t do this anymore. They used to have incredibly high tax rates. They don’t now. We would end up in many cases with a higher tax rate than most European countries. We have some philosophical dedication to small government and things like that. They don’t. And so if they’re not doing it,

Susan Pendergrass (19:43):
Yes. Yeah, yeah.

Andrew Biggs (20:02):
it’s because there’s a practical reason this isn’t a good idea. The same applies to wealth taxes. That’s been tried in Europe. They’re like, yeah, we’re not doing that anymore because it doesn’t work. But your average senator now

Susan Pendergrass (20:14):
It is happening around the country, the billionaire tax. What happens in 2032 if no one is either brave enough or smart enough to take this on in the next six years?

Andrew Biggs (20:17):
They’re just not aware of these policy issues, and that’s a real problem. It’s like having a guy fix your car who doesn’t know how to fix cars. 2032 is the date. If you have a recession, it might be 2031. It’s not certain, but it is certain it’s happening soon.

Susan Pendergrass (20:47):
Yeah. Okay.

Andrew Biggs (20:53):
There’s a literal reading of the law, which is that Social Security can’t pay out benefits it doesn’t have dedicated resources for. Once the trust fund runs out, the only dedicated resources are mostly the payroll tax, plus a little bit of money from income taxes levied on retirement benefits. And those were cut as part of the One Big Beautiful Bill. So if the trust fund runs out, they’d have to rely on the money they have on hand, which implies around a 22% benefit cut.

A lot of times people assume that benefit cut has to be across the board. If you did it that way, you’d throw a lot of people into poverty. I did some work a year or so ago with a lawyer in DC named Kristen Shapiro, and what we found is that the legal precedent shows the executive branch, meaning the president working through the Social Security Commissioner, would have some discretion. What we found is you could maintain full benefits for about 50% of people, the poorest 50% of seniors, and then cap benefits above that. If you cap the maximum benefit at about $24,000 per year for a single person or $48,000 for a couple, that is enough to make Social Security solid without raising taxes. So the point is simply you have some discretion.

The reality is Congress isn’t going to allow big benefit cuts, for political reasons. On the other hand, are they willing to have the size of tax increases needed, all in one go, to keep Social Security paying full benefits? I don’t think they want that either. So the reality is probably they’re going to borrow a lot of the money. And that’s where you get to the issue of how much more borrowing the financial markets will swallow. We effectively borrow from the public to repay the Social Security Trust Fund, but there’s an end to that. You say, okay, 2032, we have to do something. We have to raise taxes or cut benefits. If in 2032 the stated policy of the federal government is, well, we’re just going to keep borrowing to pay Social Security even though we have no prospect of paying it back, you wouldn’t blame some big market players for saying, yeah, I’m out, because you don’t want to lend money at low interest rates to someone who says they can’t pay it back. Then you start getting a couple of things. One is more federal borrowing squeezes out capital in the rest of the economy, and so interest rates naturally rise.

Susan Pendergrass (23:18):
Right.

Andrew Biggs (23:31):
But then there’s a second element: if you’re afraid the federal government can’t pay you back, over and above that natural increase in the interest rate, you’d apply a risk premium to treasury debt. You’d say, look, Treasury is not this rock-solid investment anymore. It’s more like a junk bond, or like borrowing from Illinois, and you make them pay a premium. That’s going to drive up

Susan Pendergrass (23:43):
US government borrowing. Yeah, yeah, yeah.

Andrew Biggs (24:01):
interest rates, and that makes it tougher not just for the federal government but for everybody. If you want to buy a car or a house, all your interest rates rise. There’s also going to be real temptation to inflate away the debt. The federal government doesn’t want to default on its debt, but

Susan Pendergrass (24:24):
Yeah, yeah.

Andrew Biggs (24:25):
historically the way you deal with this is inflation. Think about all the debt we took on during COVID, shoveling money out the door to everybody, and then we had massive inflation after it. A lot of those people who bought treasury debt didn’t get a good deal, because if you get 20% inflation on

Susan Pendergrass (24:34):
Absolutely. Yeah.

Andrew Biggs (24:47):
a treasury bond with a nominal fixed interest rate, that’s a real problem. So inflation becomes increasingly tempting. You look at this scenario and you’re like, can’t anybody here play this game? Every other country is not going bankrupt. We just have to do what they do.

Susan Pendergrass (24:51):
Yeah, yeah. So could we, if we really got our heads around it and started today or next year, incrementally raise the 12.4%, or incrementally get people used to lower benefits after a certain income or wealth level?

Andrew Biggs (25:18):
Sure. Yes. The way I think about it, there are two ways people think about it: the wrong way and my way. The wrong way is, let’s just pick from this menu of options to make Social Security solvent. We can raise the payroll tax a bit, raise the retirement age a bit, cut cost-of-living adjustments a bit, raise the tax cap a bit, and do these things until the system is solvent.

Susan Pendergrass (25:34):
Yes. Yeah.

Andrew Biggs (25:54):
That’ll get you a solvent program, but it won’t be a program that particularly works very well or is good for the economy. A more effective way is to ask, what do we want this system to do? If you talk about Social Security reform, what you hear is that it’s a social insurance program, a safety net, an anti-poverty program. Okay, it has to do that. And that part is really very cheap, because we don’t literally have that many poor seniors, their benefits aren’t very high, and it’s not a problem to maintain benefits for low-income seniors. When you ask what Social Security should do, nobody is saying we need to be paying high-income seniors $100,000 a year. There’s no public purpose for it. Nobody thought it out in advance. It was simply an unintended consequence. So if you’ve got things that are really costing a lot of money and have no public purpose, and those people can save for retirement on their own, you start scaling that back. The distinction I’m making is between policy changes simply for the purposes of keeping Social Security solvent, and policy changes for the purpose of making Social Security do what it needs to do, the real public purpose, and not doing things that serve no public purpose. My point is the things I’m talking about are things you should do whether Social Security is insolvent or not.

I’ll give you an example: Australia’s retirement system. Australia is a lot like us, not particularly more conservative or liberal, just sort of normal. Their Social Security program essentially is targeted at eliminating poverty in old age. It’s actually a better safety net than Social Security provides, but the benefits decline down to zero once you get above the poverty level. And to help people above that level save for retirement, everybody is enrolled in a 401k-type account. What that says is, if everybody’s participating in retirement plans as they should, the government’s job becomes easier. Their Social Security system costs about two percent of GDP. Ours costs about six percent. It’s a third as costly, provides a better safety net, and it comes because they’re actually thinking about what they’re doing.

Susan Pendergrass (28:18):
Mm-hmm.

Andrew Biggs (28:26):
We’re literally not thinking about what we’re doing. There’s a saying in business: the worst reason to do something is because we’re already doing it. That is literally how Social Security policymaking works. Nobody knows why our benefit formula is what it is or why the tax max is what it is. It’s all just stuff we inherited from the 1970s from people who were not in any way thinking clearly about what they were doing. It was people in the 70s trying to win elections, and we end up with the bag.

Susan Pendergrass (28:52):
Speaking of 2005, there was an attempt to offload a small portion of people’s contributions into the market, right? That failed.

Andrew Biggs (29:09):
That was the Bush proposal. I was in the White House then, kind of in a number-cruncher role, so I knew that stuff pretty well. I did a lot of events with President Bush around the country. When we came up on the 20th anniversary of Bush’s proposal in 2025, I started thinking to myself, what if his plan had passed? What would have happened? So I built a model. Back then they were saying, okay, you’re going to have some reductions in traditional Social Security benefits for middle and high-income people, and then you’re going to have a personal account where you can invest part of your existing payroll tax in stocks and bonds. The total benefit you get at retirement is a combination of those two. People were speculating. Well, we don’t know what the stock market’s going to do. But 20 years later, we’ve got some data, so let’s just see what happened. The results were that for people

Susan Pendergrass (30:01):
Now we do.

Andrew Biggs (30:07):
retiring today, low and middle-income people would have had higher total benefits by a little bit. The very highest-income people, their benefits would be down by a couple percent because the cuts to their traditional benefits would be larger than the gains from their personal account. But even they would be fine; it’s not a big deal. Going forward, it looked like people would do a little bit better with the Bush plan than with the traditional system. But here’s the important thing: the traditional system is broke. We just talked about how it goes broke in 2032, with huge deficits. The Bush proposal wouldn’t have made Social Security totally solvent, but it would have addressed half or two-thirds of the long-term funding gap. So you’d get a system that would have paid you benefits around the same as, or maybe a little bit better than, Social Security, but would be in much more solid financial shape. Today the times are different, and I don’t think personal accounts are really viable. But the point is, if they had done something back then, everything could be easier today. But members of

Congress were just too afraid. Republicans were afraid of taking the political hit. For Democrats, it was too tempting to give the political hit. They knew they had to do something, but they couldn’t swallow hard and say, look, let’s just go in on this thing together. They didn’t want to give Bush the win because by that point Iraq was going badly and they really didn’t like him. So they beat him up. But the problem is Bush served his term and is happily retired in Texas. The people who really got screwed were the ones who depend on Social Security, because we didn’t fix it. And you just hope that’s not what we do again.

Susan Pendergrass (31:42):
Yeah. Somebody not us in 2045 could be having the same conversation, right? Like, if only in 2025 or 2026 we’d gotten serious. And I do think people mix up the trust fund with the whole program. A lot of people think all of Social Security is going to be bankrupt in six years, versus the reality that we’re still taking in a trillion dollars, we just need about 22% more than what we’re taking in.

Andrew Biggs (32:14):
Yeah. If you go back 20 or 25 years, there were all these arguments about whether the trust fund is real or fair or whatever. The trust fund is essentially IOUs written from one side of the government to the other. I thought at the time the trust fund is not real in an economic sense. It doesn’t make it easier for the government to pay Social Security benefits. It is a pledge that we will pay them, but it doesn’t make it easier to pay them. But here’s the interesting thing:

Susan Pendergrass (32:25):
Right. Al Gore. The lock box.

Andrew Biggs (32:50):
if having a trust fund doesn’t make it easier to pay benefits, then not having a trust fund doesn’t make it harder. The trust fund runs out, we still have taxes coming in, we can still pay 80% of what is owed. If we retarget that, you can maintain the safety net. It’s not like you’re totally insolvent or broke. All those long debates over whether the trust fund is real get resolved because the trust fund itself is gone in six years. So that doesn’t matter very much anymore. But I do hope that, as you said, we’re not in 2045 looking back on a solution of just borrowing $500 billion a year or whatever it’s going to be. People in 2045, when the federal government is bankrupt, the dollar is dropping, and all these financial crisis things we think only happen to other countries are happening to us, they would look back and say, I wish those people were more responsible. The Social Security problem, in a sense, if we went back 25 or 30 years ago, was a manageable problem. The real issue is not the demographics or the benefit growth or whatever. The real issue is just poor stewardship of this program by Congress and respective presidents. It is absolutely a governance problem. It is not a problem of economic or demographic fundamentals. All of that can be handled.

Susan Pendergrass (34:19):
Everyone wants to be Santa Claus, right? No one wants to be the Grinch.

Andrew Biggs (34:22):
It’s very true, but leadership is about giving people bad news. Good news kind of tells itself. Bad news has to be told and people have to be convinced that this is going to hurt, but we’ve got to do it. And we just didn’t have the willingness. President Clinton in the late nineties tried to do some stuff, but he didn’t deliver much bad news because we had surpluses. President Bush was willing to tell people, okay, look, you’re not going to get every penny you’ve been promised. Beyond that, the level of leadership has been very poor.

Susan Pendergrass (35:01):
Hasn’t been good. All right, well, next year when the trustees report comes out, come back and give us more bad news.

Andrew Biggs (35:09):
Yeah, until then, things are looking up. But no, it’s something people want to be aware of, and I think that’s the key thing.

Susan Pendergrass (35:13):
Well, I think one of the more important things you said is that no one understands it. People are upset and arguing over something they don’t understand the mechanics of. I do know people who think they have an account with their name on it that their Social Security taxes went into, and they’re just going to start taking the money out.

Andrew Biggs (35:23):
I have some bad news for that. Your taxes go into Social Security and go straight out the door to pay for your grandmother’s benefits. If you want to know where your taxes are, they’re in your grandmother’s bank account. So go ask her.

Susan Pendergrass (35:45):
That’s right. That’s right. All right, thank you so much. I really appreciate the time.

Andrew Biggs (35:51):
Thank you, Susan. It’s a pleasure to be with you.

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The post The Social Security Crisis Is Worse Than You Think with Andrew G. Biggs appeared first on Show-Me Institute.

Life comes at you in waves. You graduate high school, watch friends start careers, get married, and have kids. Then social media shows you their children repeating the cycle. As a member of the Pacific High School Class of 1999, I didn’t expect to reach the retirement wave so soon.

Yet a recent post stopped me: a high school classmate, still in his mid-40s, announced his retirement after 25 years in Missouri public schools. Most recently a principal earning roughly $130,000 per year, he is now eligible for approximately $71,500 in annual (with cost-of-living adjustments) pension benefits for the rest of his life. He can also continue working and earning additional income.

He is retiring at exactly the age when most professionals hit their career peak—when experience, leadership, and judgment are most valuable. And that’s the problem.

Missouri’s Public School Retirement System (PSRS) is pushing talented educators out of the classroom at the very moment students and schools need them most. This isn’t just a fiscal issue. It’s a direct loss to Missouri’s school children.

My classmate is doing exactly what the system incentivizes him to do. The “25-and-Out” provision hands him a guaranteed lifetime annuity worth over $3 million in today’s dollars. He’d be foolish not to take it. But Missouri schools are left without a proven leader right when his institutional knowledge and expertise could have the greatest impact.

This is the perverse reality of the current defined-benefit system. It encourages strong teachers and administrators to leave mid-career, creating turnover, knowledge gaps, and disruption for students. Districts then spend time and money searching for replacements, often settling for less experienced candidates.

Reform is long overdue. What could Missouri do?

• Raise the minimum age or service requirements for unreduced early retirement.
• Adjust benefit formulas for new hires to match longer careers and lifespans.
• Offer new employees a hybrid or defined-contribution plan with portability and shared risk.

Current retirees and vested members should be protected. But going forward, incentives should align with what’s best for students. Competitive benefits matter, but not at the expense of keeping great educators in our schools during their most productive years.

The post Life Comes at You in Waves—And Sometimes It Brings Early Retirement appeared first on Show-Me Institute.

The Reason study finds that U.S. state and local governments held approximately $6.1 trillion in debt at the end of FY 2023. That figure breaks down roughly as $2.66 trillion at the state level, $1.4 trillion among municipalities, $1.27 trillion in school districts, and $757 billion in counties.

For state governments alone, Reason reports $2.7 trillion in debt as of end of 2023, which is about $8,000 per person nationally. The methodology includes near‑term liabilities (like unpaid bills and payroll) plus long‑term obligations (bonds, pensions, and retiree health).

Missouri ranked 25th in combined state and local debt at $53.34 billion. Broken down per capita, Missouri ranked 43rd at $8,829.

Truth in Accounting’s evaluation looked only at the state budget and divided the amount by taxpayer—while Reason considered state and local debts and divided by population. TIA concluded Missouri had a Taxpayer Surplus™ of approximately $200 per taxpayer. Lastly, Reason relied on 2023 data while TIA used 2024 numbers.

The TIA result is reassuring at first glance—but that’s because it looks only at the state obligations. Reason’s analysis reminds us that local governments carry significant obligations beyond what the state government balance sheet shows.

Missouri’s fiscal position is better than many states—but neither the TIA nor Reason analyses justify complacency. Policymakers at every level of government in Missouri should focus on liabilities, funding discipline, and structural reform. This includes being mindful of the long-term commitments we have made to fund government employee pensions and healthcare plans.

A lot of attention is focused on cutting taxes, and that is worthwhile. But fiscal restraint is not merely about cutting taxes—we must rein in our spending too, and that includes long-term commitments.

The post New National Debt Analysis Offers Fresh Lens for Missouri’s Fiscal Picture appeared first on Show-Me Institute.

TIA uses full accrual accounting, which tracks not just current bills but also long-term promises such as pensions and retiree healthcare. Unlike state budget reports that can hide liabilities, TIA’s numbers tell the fuller (and often less flattering) story.

This year, Missouri reported a Taxpayer Surplus™ of $200 per taxpayer, meaning the state had enough money on hand to pay all its current bills with a small cushion left over. By TIA’s definition, that just clears the bar for a “B” grade, which applies to states with a surplus between $1 and $9,999 per taxpayer.

The grade reflects a genuine, if modest, improvement. In 2023, Missouri’s shortfall stood at $700 per taxpayer. That was enough to earn a “C” and a middling 25th-place finish nationally. In years prior, the story was worse: in 2020, the state’s Taxpayer Burden™ was $4,400.

So what’s behind the jump from “C” to “B”? Mostly, factors outside the state’s control. According to TIA’s report (page 83): “Missouri may lose $6.5 billion in federal funding (16 percent of expenses) if allocations return to 2019 levels, adjusted only for inflation.” That funding came largely through pandemic-era support, and it helped cover immediate costs. But it isn’t permanent.

Meanwhile, strong stock market returns—especially in 2022—helped reduce Missouri’s reported pension liabilities. Yet these gains are fragile. They can quickly disappear in volatile markets, as TIA’s report explains, and they don’t fix structural imbalances in how pension systems are funded.

Those structural issues remain. As Sheila Weinberg, founder and CEO of TIA, put it in a recent correspondence: “even with a 26% investment return in 2022 and an additional $1.1 billion contribution in 2023 . . . the state’s contributions and investment income are not enough to keep pace with the interest and new benefits accruing on the pension debt.”

That’s a concern taxpayers should take seriously. Missouri’s pension systems, especially the Missouri State Employees’ Retirement System (MOSERS), have long carried unfunded obligations. The surplus reported today is in part a reflection of how those liabilities are calculated—not a signal that they’ve been resolved.

That brings us back to the bigger issue: standards. Missouri, like nearly every other state, follows Governmental Accounting Standards Board (GASB) rules, which permit states to understate liabilities and delay recognizing certain costs. TIA recommends moving instead to the standards used by publicly traded companies: full accrual accounting and ERISA (Employee Retirement Income and Security Act)-like funding requirements for pensions.

Judi Willard, TIA’s communications director, summarized the case for changing standards plainly: “[these reforms] will create long-term stability for the states, create transparency in government spending and protect the taxpayers from unscrupulous elected officials who would rather spend now and pay later, which sadly the current accounting standards allow.”

There’s merit to that argument. Missouri’s improved ranking may be encouraging, but it is not a sign that long-term fiscal problems have been solved. The gains are largely circumstantial. Without broader reform in how the state budgets and reports its obligations, today’s surplus could just as easily become tomorrow’s deficit.

So yes—credit where it’s due. Missouri’s “B” grade reflects careful budgeting, a resilient economy, and a short-term boost from federal aid. But structural pension pressures remain. Federal dollars are fading. And the state’s accounting standards still obscure the true cost of government.

A budget that only looks balanced on paper won’t protect taxpayers in the long run.

The post Missouri Earns a “B” in New Fiscal Report—but Don’t Pop the Champagne Yet appeared first on Show-Me Institute.

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Kansas City and St. Louis are notably highlighted for their fiscal challenges. Kansas City is ranked 57th, while St. Louis is positioned at 59th. Both cities have been assigned “D” grades, indicating significant financial distress. This distress is quantified through the “Taxpayer Burden” metric, representing the amount each taxpayer would need to contribute to settle all municipal debts. In Kansas City, this burden amounts to $8,800 per taxpayer, whereas in St. Louis, it escalates to $9,800. ​

A primary factor contributing to these burdens is the underfunded pension liabilities in both cities. Unfunded pensions place taxpayers and city services at risk, leading to increased debt and financial instability. ​

The implications of such financial distress are profound. Residents may face reduced public services, increased taxes, or both, as cities strive to balance their budgets. Moreover, fiscal instability can deter business investments, stymie economic growth, and erode public trust in local governance.​ This is in addition to both cities’ struggles providing public safety.

Addressing these challenges necessitates a multifaceted approach. Cities must prioritize fiscal responsibility, ensure transparent accounting practices, and engage in proactive financial planning. Fostering economic development can help alleviate fiscal pressure, but it must be real development, not the sort we have seen for decades that merely transfers tax dollars to corporate cronies.

There is an urgent need for comprehensive fiscal reforms in both of Missouri’s largest cities. Without prompt and effective action, residents will bear the brunt of past financial mismanagement for years to come.

The post Can We Handle the Truth . . . of Our Cities’ Financial Status? appeared first on Show-Me Institute.

I’m skeptical, and you should be too.

This is a claim that cities and states like because it makes their leaders look financially responsible. But it’s often just a result of bookkeeping sleight of hand. Governor Mike Parson made the same claim in January, and it wasn’t true then, either.

The accounting trick consists of merely looking at the cash you have on hand and not considering your long term-debts. Truth in Accounting (TIA), the indefatigable men and women who pore through annual reports, issued its State of the Cities report in February 2024. St. Louis ranked 64th in financial health out of the top 75 cities examined. The authors wrote:

St. Louis’ financial condition appeared to improve due in part to increased tax collections and federal COVID relief funds. Despite the good news, it still had a Taxpayer Burden™ of $11,100, earning it a “D” grade from Truth in Accounting. But the improvement is deceiving, because the city used outdated pension data.

On pages 150 and 151 of the report, available online here, TIA lists St. Louis’s assets and liabilities. The report must use 2022 data because St. Louis is not a stickler about releasing its financial data in a timely manner. Despite being in the red, St. Louis’s cash-basis accounting allows it to consider the money it has on hand without considering its long-term debts. It’s akin to getting a cash advance on your credit card and pretending you’re richer as a result.

If the comptroller wants to make such claims, she should release a complete and to-date copy of the city’s books. Until then, I am going to assume that if it sounds too good to be true, it probably is.

The good news is that we here at the Show-Me Institute, and the fine folks at Truth In Accounting, are dedicated to making sure people understand the truth about city and state finances.

The post Be Skeptical of Claims St. Louis is Running A Surplus appeared first on Show-Me Institute.

Now there is one more “doom loop” article about the challenges facing St. Louis. Governing magazine wrote recently about how declining downtown activity leads to economic decline. Its observations are similar to those in the Journal. Cities like St. Louis, where vacant office spaces drive down property values, are experiencing a vicious cycle where diminished tax revenues lead to reduced public services, further pushing businesses and residents away. According to Jason Bram, an economist interviewed in the article, “It’s a very slow-moving, long-term trend that’s only gotten worse.”

This pattern of urban decline is related to the broader challenges facing cities that fail to address fundamental issues like public safety, infrastructure, and housing. St. Louis, already burdened by economic stagnation, could face further setbacks unless city leaders refocus on foundational public services.

Flashy developments like downtown stadia won’t cut it; St. Louis needs to avoid repeating those expensive mistakes. Instead, cities should prioritize core services. For St. Louis, that means investing in improving public safety, maintaining infrastructure, and focusing on policies that encourage growth.

Without addressing these fundamental issues, St. Louis risks being caught in a permanent cycle of decline. Other cities should also heed this warning and ensure that they focus on sustaining a healthy urban core before chasing grandiose development projects.

The post The Many Doom Loops of St. Louis appeared first on Show-Me Institute.

Fast forward to 2024, and that sales tax is up for renewal. However, because the pension system is much better funded now, city leaders don’t want to renew the 3/4 cent sales tax as it is. That would generate more money for the pension than it needs.

So Springfield leaders put a commission together to come up with ways to alter the tax revenue distributions before it goes to voters in November.

A Kinsley Gaffe is when politicians accidentally say something truthful they didn’t mean to. (This is the second such gaffe worth highlighting in Missouri in the past few months.) In this case, the statement is filtered through the media, I admit, but the reporter must have got the gist of it from local leaders:

The tax will sunset at the end of March 2025, hence why the city has been adamant to put a replacement tax on the November ballot to avoid a lapse in the sales tax that local shoppers would feel. (emphasis added)

A lapse that voters would feel? Meaning a tax reduction Springfield residents may actually like? Dear Lord, we certainly can’t have that. If they like the reductions, they may not vote to increase the tax when we want them to, Oh, the humanity.

The new proposal is for voters to keep a 1/4 cent sales tax for public safety—which can still include pension costs—and change the rest of the tax (1/2 cent) to fund “comprehensive plan capital and parks projects and neighborhood and community initiatives.” (More on that issue later.)

Springfield still has a defined-benefit pension plan for its public safety employees. It should have switched to a defined-contribution plan years ago. At least the city, according to the article, closed the old plan to new members several years ago and, presumably, replaced it with a less generous plan for new hires. That’s progress, but a defined-contribution plan for Springfield employees would have been better for the taxpayers and the city. Throwing tax dollars at the pension fund appears to have worked for now, but further change is needed. As former Show-Me Institute Chief Economist Joe Haslag wrote about the Springfield pension situation years ago: “The existing approach got Springfield into this situation. Some reform is needed to avoid the same problems in the future.”

The post Springfield Wants to Be Darn Sure Its Sales Tax Rate Doesn’t Ever Go Down appeared first on Show-Me Institute.

If I offered you $100,000 a year for the rest of your life to retire from your current job, would you take me up on the offer? What if I said you could have the money and also get a different job if you wanted? If you would answer yes to these questions, you have gone a long way toward understanding why turnover is high among public school superintendents. We financially incentivize them to “retire.”

Take a look at the recent article from Springfield News-Leader’s Claudette Riley, in which she discussed the problem of superintendent turnover. Nearly every person cited in the report was a superintendent who has retired and is working another job. Doug Hayter retired as superintendent of Branson Public Schools; he now draws his retirement benefit and serves as the executive director of the Missouri Association of School Administrators (MASA). Kelly Hinshaw and John Jungman, also quoted in the report, are retired administrators who now work for MASA.

Given the rules of our current state pension system, it makes financial sense to do just as these folks have done. Consider some of the other retiring superintendents listed in Riley’s report. Shawn Randles is retiring from the Logan-Rogersville School District. After a 31-year career, he’s eligible to draw 75 percent of his final average salary of $152,002 for the rest of his life. Depending on the payout he chooses, this could be as much as $114,000 a year. According to Riley, Randles “plans to start a second career in an education-related field.”

Chris Ford, Fordland’s “retiring” superintendent is in a similar position. He’s eligible to draw $108,000 a year for the rest of his life while continuing to work. He has taken a position at Evangel University.

We are told turnover among superintendents is high because the job is stressful. It is curious then that many retire and take up similar positions in other states. Take Crane’s retiring superintendent, Chris Johnson, who has accepted the superintendent post in Prairie View, Kansas.

Stress may be a factor, but the truth is that superintendent turnover is high because our state’s pension system makes it financially beneficial for our veteran administrators to leave. They can earn more by retiring than they could if they kept working.

As Riley’s piece explained, superintendents are eligible to retire after 30 years of service in the profession or after their years of service plus their age equal 80. This means that someone who starts teaching right out of college could be eligible for retirement by their mid-50s. These individuals can then draw their pension and take on new roles, as long as those roles are not covered by Missouri’s Public School Retirement System.

We should applaud efforts to mentor and train superintendents, but if we truly want to reduce turnover the solution is clear—we must change our retirement system. This does not have to mean abandoning the current defined-benefit pension system, though offering a defined-contribution option is something that should be considered. The solution could be as simple as allowing superintendents to draw early disbursements from their pension fund while retaining their current jobs. This would diminish the financial pull to retire and take up a new job in another state or outside of PSRS.

As long as we continue to make it financially lucrative to retire, we will continue to see our best educational administrators retire shortly after they hit year 30.

The post To Reduce Superintendent Turnover, Change the Pension System appeared first on Show-Me Institute.

Daniel DiSalvo is a senior fellow at the Manhattan Institute and a professor of political science in the Colin Powell School at the City College of New York–CUNY.

Read Big City Pensions and the Urban Doom Loop here.

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Chad Aldeman is the Policy Director of the Edunomics Lab at Georgetown University. Prior to joining the Edunomics Lab, Chad worked at Bellwether Education Partners and the U.S. Department of Education. He has published reports on K-12 and higher education accountability systems; school choice; and teacher preparation, teacher evaluations, and teacher compensation. He also served as the founding editor for TeacherPensions.org. His work has been featured in the Washington Post, New York Times, and Wall Street Journal. Chad holds a bachelor’s degree from the University of Iowa and a master’s of public policy degree from the College of William and Mary.

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The post How We Fund Schools with Chad Aldeman appeared first on Show-Me Institute.

The cities covered in the report are:

• Ballwin
• Blue Springs
• Cape Girardeau
• Chesterfield
• Columbia
• Florissant
• Independence
• Jefferson City
• Joplin
• Kansas City
• Lee’s Summit
• O’Fallon
• Springfield
• St. Charles
• St. Joseph
• City of St. Louis
• St. Peters
• University City
• Wentzville
• Wildwood

Click here to read more, or download the report by clicking on the link below.

The post Tax Burden in Missouri’s 20 Largest Cities appeared first on Show-Me Institute.

The post Tax Burden in Missouri’s 20 Largest Cities appeared first on Show-Me Institute.

Missouri is in that majority.

Missouri’s debt burden was $8.2 billion in fiscal year 2020. That’s $4,400 per taxpayer needed to fully pay the state’s bills, up from $4,300 the year before. Much of this debt burden comes from unfunded retirement obligations, for which “the state had only set aside 60 cents for every dollar of promised pension benefits and 6 cents for every dollar of promised retiree health care benefits.” This debt burden earned Missouri a “C” grade and a ranking of 24 out of the 50 states for fiscal health.

This report provides further evidence that Missouri was not in a financial position to successfully weather the economic downturn that followed the COVID-19 pandemic, something my colleague Elias Tsapelas and I have written about. Re-evaluating our tax structure and tackling pension problems (by shifting employees to defined contribution accounts, for example) would likely improve Missouri’s grade and ranking in this report. Fixing the state’s fiscal health is a big task, but it’s something that lawmakers should start to prioritize.

The post Missouri Is in Poor Fiscal Health appeared first on Show-Me Institute.

In the 2021–22 school year, 39 percent (yes 3-9 percent) of education dollars will be spent on pensions. While education spending has grown 17 percent since 2000, teacher and administrator pension costs have risen 458 percent. 458 percent!

When the pension part of the state spending pie grows, the other slices of the pie shrink. That means that money that could be going to today’s teachers is going to yesterday’s.

Pensions are a perfect storm for governmental jiggery-pokery. The bill for bad decisions doesn’t come due for years after most of the people making decisions are out of office. The benefits are clear to those receiving them but are opaque to taxpayers (who tend to focus on metrics like teacher salaries, not total teacher compensation). Legislators can hide behind actuarial alchemy to obfuscate the magnitude of their decisions. Everyone wants teachers to have a safe and solid retirement, so quibbling with how much is spent can come off as teacher bashing.

Thankfully, Missouri is not nearly in the dire straits that Illinois is. Now, Missouri pensions are unfair. They invest in riskier assets to chase higher returns when they are underperforming. And, they are a bad deal for most teachers. But Illinois still serves as a cautionary tale for us.

And ballooning pension costs are bad for everyone (except, to be fair, those who are receiving them). It is bad for current teachers and students, who miss out on funding that could be used to support them. It is bad for current legislators, who have less money to spend on higher education, healthcare, roads and bridges, and more. And it is bad for future teachers, students, and legislators, who will be hemmed in by the decisions that their forebears made.

The great political philosopher Edmund Burke argued that the social contract is “a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born.” Irresponsible pension policy violates that social contract and should be roundly criticized. Well done to the good folks at Illinois Policy for doing so.

The post Why We Need to Take Pension Costs Seriously appeared first on Show-Me Institute.

Truth in Accounting’s report ranks the country’s 75 most populous cities by their taxpayer burden (or surplus for a few cities), a number calculated by dividing the money needed to pay the city’s bills by the estimated number of city taxpayers. A larger taxpayer burden means a larger rank number.

According to the report, Kansas City went into the pandemic in poor fiscal health, with a $1.7 billion debt burden. This equates to a taxpayer burden of $11,300 per person and lands Kansas City at 57th in the country. St. Louis City is in even worse shape. Financial decisions have left St. Louis with a debt burden of $1.3 billion and a taxpayer burden of $14,600 per person. St. Louis ranks 63rd out of the 75 cities in the report. Missouri’s two largest cities both received a D grade for fiscal health.

All the cities on this list, including Kansas City and St. Louis, have balanced budget requirements, meant to “prevent elected officials from shifting the burden of paying for current-year services to future-year taxpayers.” As explained in the report, “if a city has a balanced budget requirement, then spending should not exceed earned revenue brought in during a specific year. Unfortunately, in the world of government accounting, things are often not as they appear.” Cities can do things such as keeping pension and other employment compensation costs out of the budget to give the illusion of a balanced budget. For example, Kansas City has $870 million and St. Louis has $380 million in underfunded pension benefits for city employees, so they each clearly need to be contributing more each year to the city pension funds to achieve true financial stability (as well as moving forward, not backward, with pension reforms).

Times are tough for individuals, businesses, and governments, but we shouldn’t forget the importance of accountability and balancing the budget. Truth in Accounting has released this report in previous years, and St. Louis and Kansas City have continuously ranked in the bottom third of cities. Show-Me Institute researcher Patrick Tuohey wrote this years ago and it still holds true: Instead of chasing shiny new projects and schemes, policymakers “should focus on the less glamorous but more important task of regaining sound fiscal footing.”

The post Kansas City and St. Louis Receive D’s in Fiscal Health appeared first on Show-Me Institute.

There are other sorts of inequities, however, that are much stealthier. They are no less unfair, just less noticeable. Take for example the Public School Teacher’s Retirement System of Missouri. Most public school teachers love this retirement plan. It allows many teachers to retire by their mid-fifties and earn a steady income for the rest of their lives. But most teachers don’t know that this system has been built with a structural flaw that favors some individuals over others.

As Andrew Tipping and I demonstrate in our forthcoming peer-reviewed article in Educational Researcher, “Cross-subsidization in Teacher Pension Benefits: Examining Rates of Return Among School Districts,” teachers in some school districts get disproportionately larger returns on their retirement contributions. We calculated the rate of return for a career teacher in 490 school districts. The rate of return is the interest rate that would be needed, based on all contributions, to pay out a specific benefit for a pre-determined period of time. For instance, if I put $100 into a savings account and wanted to take out $110 in a year, I would need to earn a 10 percent return. We simply do the same sort of calculation, but over a 30-year career and a 30-year retirement. We find a tremendous disparity in the rates of return among career teachers in different school districts. The variation of rates of return among school districts is displayed in the histogram below taken from our article:

Source: Authors’ calculations on the basis of Missouri School Boards’ Assocation (2015), Public School Retirement SYstem of Missouri (2016), and district salary schedules.

We found that in general, smaller, lower-paying school districts have lower rates of return and larger, higher-paying school districts have higher rates of return. This occurs because of the structure of the system. So why does this happen?

Let me try to explain. Imagine you and I decide to pool our investments, and we each invest $500 for a total of $1,000. Only, we do not invest our money all at once. We do it over a period of five months. You invest $100 every month for five months. I invest $65 the first month and increase my investment each month with a final contribution of $123 in the fifth month. I somehow convince you that we should base the payout on just the fifth period and not our entire investment. We earn a 10 percent return on our $1,000 investment, but distribute the funds based on our final period five contributions, which leads to a 45/55 split, despite both investing the same amount of money in total.

That is essentially what happens in the pension system and no one seems to notice.

Teachers in poorer school districts contribute more in the beginning of their career relative to the end, and because of the way the system works, they end up subsidizing the retirement benefits of teachers in wealthier school districts. This cross-subsidization of pension benefits occurs because benefits are not tied to total lifetime contributions. In fact, only the final three years out of a teacher’s entire career are used to determine benefits. It is this design of the system that allows this unfairness to occur. Yet, unlike my first graders, no one seems to be shouting out “That’s not fair!”

The post Unfairness in Missouri Teacher Pension System appeared first on Show-Me Institute.

Advocates for Missouri’s current defined-benefit pension system argue that this type of system, where teachers are promised a generous and guaranteed pension once they retire, is needed because it increases teacher retention. Yet, there is little evidence that this type of system is a cost-effective method for increasing teacher retention. Rather, the example of these superintendents demonstrates how the system pushes out high-quality individuals. It does the same for teachers (teachers and superintendents are in the same pension system). When teachers hit 30 or 31 years, regardless of their quality or their desire to continue teaching, the financial incentive of the pension pushes them out.

Recently, Gov. Parson asked school superintendents to come up with a plan to increase teacher pay. One solution, which I have little hope will ever be recommended by the superintendents, is to change how we compensate teachers. A pension is basically a form of delayed compensation. We require teachers and their districts to contribute 14.5% of their salary to the pension system (the numbers are different in St. Louis City and Kanas City). That’s 29% of a teacher’s salary that is going into a pool that they may have access to if they make it to retirement.

We could give teachers in Missouri a 10% raise next year, with minimal cost to the state, if we just change this system.

Currently, teachers in the Public School Retirement System (PSRS) do not contribute to Social Security. The pension system is their only required retirement savings. In this proposed scenario, the teacher would receive a 10 percent raise on his or her salary. The teacher would begin contributing to Social Security (6.2 percent from the individual and the employer) and would be eligible for Social Security benefits. Additionally, the teacher and his or her employer could contribute a combined 5 percent of salary to a defined-contribution retirement account, such as a 401k or a cash balance plan. Of course, with a smaller raise the teacher could contribute more to retirement. 

There are numerous benefits to this proposal. First, teachers would own their retirement accounts. They would not lose any money if for some reason they do not vest at five years. They could also continue to work past 31 years and their accounts would not lose value. Teachers could also choose to invest more in their account, as many do now in 403b accounts.

The biggest benefit is that teachers would have higher salaries today. If we want to keep our best teachers and superintendents, higher salaries are a much more effective tool than outdated pension systems.

The post We Could Give Teachers a Ten Percent Raise Next Year appeared first on Show-Me Institute.