City Teachers Guaranteed 8.25% Returns on 403(b) Plans
This is one of those stories that just makes you yell WTF! at the top of your lungs. From the indispensable Pension Tsunami website comes a link to this report about the teachers union’s unbelievably lavish defined-contribution plan. In addition to their insane pension benefits, which are breaking the backs of the city and state budgets, many government employees can also participate in a 403(b) plan, the public-sector equivalent of a 401(k) plan.
But unlike mere mortals, who take their chances with market performance when they invest in a defined-contribution plan (maybe getting a small matching contribution from their employers if they’re lucky), the New York City Teachers Retirement System offers a 403(b) where participants are guaranteed (by the taxpayers, of course) never to earn less than 8.25% annually.
To call 8.25% generous would be an understatement. Batshit insane would be closer to the mark. All reward and no risk, where do I sign up? The provision has been in place for at least 20 years, and although it is due to expire June 30, you’re dreaming if you think our ball-less state legislators won’t renew it.
According to the article, if a move is made to reduce the rate, the union is expected to argue that the guaranteed return cannot go below 7%, because the state constitution prohibits pension benefits from being “diminished or impaired.” I would argue, however, that since a 403(b) is a defined-contribution plan rather than a defined-benefit plan (notwithstanding the bizarre guaranteed return provision in this particular instance), it doesn’t qualify as a pension.