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Virginia Journal of Education


 

On Point

Don't Mess with VRS!

by Dominic Melito

Do you know the difference between a defined benefit and a defined contribution retirement plan? You should: Not knowing could mean a 48 percent cut in your current overall retirement benefit!

Under a defined benefit plan, like public school teachers have now through the Virginia Retirement System (VRS), your benefit is guaranteed for the rest of your life. If you live to be 100, you will continue to receive a pension check. With a defined contribution plan, like a 403(b), when the money runs out, it runs out.

Reasons why a defined benefit plan is better than a defined contribution plan abound.  Here I will focus on the following four main reasons: the benefit is guaranteed, the employer bears the investment risk, there are cost of living adjustments, and the benefits are predictable.

In the 1990s and even into the new millennium, it looked like investments could only go up. But, after the Great Recession, it’s clear that the market has its ups and downs. Where will the market be when you retire? If you’ve worked hard for 30 years and are ready to retire, should the status of the stock market matter? In a traditional pension plan, the performance of the stock market when you retire will have no bearing on your retirement benefit. However, with a defined contribution plan, if the market is down when you’re ready to retire, your choices are limited: make up the difference with your own money, live on less than you anticipated, or hold off retiring. Personally, I’d rather retire when I’m ready, not when the market is “just right.”

One of the most valuable parts of a defined benefit plan is the cost of living adjustment (COLA.) As inflation kicks in year after year, COLAs help offset the increased cost of living. Under a defined contribution plan, no such adjustments occur. You merely have to make due with less buying power, or use more of your savings.

People are living longer and longer. Many people now may be retired for almost as many years as they worked. Because the payout in a defined benefit program is based on a formula, the ability to predict the benefit you will receive when you retire makes planning much easier.  For school board employees, the formula is 1.70% x years x AFS = your yearly retirement benefit (1.70% is the multiplier; years = years of service; and AFS is the average final salary based on the average of the highest 36 consecutive months of salary or three-year equivalent for educators).  For example, 1.7 x 30 years x 60,000 = $30,600. If you retired today and qualified for a $30,000 annual traditional pension, in order to have the same benefit from a defined contribution plan you would need to have between $600,000 and $750,000 in your account. Even if you do have that much, what happens if the economy tanks? What will you do? What happens if you live much longer? Meanwhile, the traditional pension is guaranteed for the rest of your life, and there will be yearly cost of living adjustments.

It’s clear that the defined benefit plan is far superior to a defined contribution plan. However, a defined contribution plan should certainly be a part of any retirement plan- as a supplement!  Contributing money towards a 403(b) or similar defined contribution plan is a wise way to help plan for your retirement. If you don’t already have one, you should get one now. It is better to contribute a little bit of money early to a 403B for a long time than it is to make larger contributions later in your career for a shorter time. I’m learning that lesson as you read this.

Is a traditional, defined benefit plan worth fighting for? You bet it is! Is the traditional pension plan under attack? Absolutely! During the 2010 Virginia General Assembly session, there were several bills considered to lower VRS costs, including a complete replacement with a defined contribution plan. According to a 2008 study of VRS (on which many of the bills were based,) switching completely from a defined benefit plan to a defined contribution plan would lead to a 48 percent cut in the overall retirement benefits for school employees!

The VEA and its members fought off any changes to the VRS that would affect any school employees who had jobs in 2009-10. As the state budget tightens further, more attempts to weaken our VRS will be proposed.  Our traditional pension plan is worth fighting for, and we deserve it. We work hard for it, and we do important work.

VEA’s Legislative Agenda for the 2011 General Assembly session calls for no further weakening of VRS. If you haven’t done so already, tell your legislators to leave our VRS alone!

Melito is president of the Virginia Beach Education Association.

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