Recently, the New York Daily News published an article by public school teacher Emmanuel George. He has taught in both traditional public schools and in a charter school. Like Pennsylvania, George notes that New York is facing a pension crisis. He suggests moving teachers from defined benefit pension plans to a 403(b) plan – the public sector’s version of the 401(k) plan.
With a pension, most teachers are forced to contribute a set percentage of their base salary, and the district is typically forced to contribute an additional percentage. With a 403(b), I choose how much to contribute to the fund over time, and my school matches my pre-tax contributions. Because my school doesn’t have to make onerous pension contributions, I take home at least 20% more pay than I would in the Department of Education in base salary and performance bonuses. That means every year I have an additional $15,000 I can invest as conservatively or aggressively as I like.
If an emergency or a job offer compels a move out of state, my investments and the interest move with me. At Democracy Prep, after just five years, 100% of my school’s contributions are mine to take with me as well.
I’m sold, as we’ve advocated this approach, but some argue a 403(b) is riskier than traditional pension plans. George notes pension plans are subject to the exact same risks. The only difference is that you have the option to choose for yourself how much risk you will expose yourself to with a 403(b) plan.
Likewise, research from the Department of Economics at the Massachusetts Institute of Technology suggests under normal conditions, an individual in a DC plan with substantial investments will usually achieve higher earnings than in a public sector DB plan.