Gov. Kay Ivey is promising to make school choice a priority in the 2024 legislative session, particularly through Education Savings Accounts (ESAs). ESAs are a form of school choice where state funding goes to an account administered by parents or guardians to pay for public or private schools or homeschooling expenses.
At the same time, Dr. David Bronner, the CEO of the Retirement Systems of Alabama (RSA), opposes school choice, which may adversely impact the RSA system if many teachers leave the public system for the private.
I find Bronner’s opposition to school choice surprising given the RSA’s commitment to Alabama's economic development through investments like the Robert Trent Jones Golf Trail. The health of our public schools ultimately depends on Alabama’s economic health, and like it or not, school choice is now an economic development issue.
Because of this, I suggest letting private schools – which will receive public funding under school choice – participate in the RSA.
I am an economist and will not consider legal issues with private sector employees joining the "state” pension system. However given the legal changes necessary for ESAs, I presume that any legal changes necessary for pension eligibility are feasible.
The value provided by pensions generally and the RSA specifically are what motivate my suggestion. Behavioral economics documents how many people apparently fail to save enough for retirement. I use the “apparent” qualifier because people may not really desire their claimed retirement income.
Employer-provided pensions address this problem. Defined benefit plans paying pensions based on years worked and salary best offset myopia by making the withdrawal of money prior to retirement difficult.
Pensions involve return risk – the possibility of not earning anticipated investment return to fund retirement benefits – and longevity risk – outliving one’s assets. Economics suggests that the party in a transaction better able to bear risk should do so. Defined benefit plans place these risks on the plan, which should be beneficial. State pensions further let members purchase annuities at close to the actuarial cost in contrast to the hefty fees charged to people with 401(k)s.
Pensions, however, are vulnerable to what economists call opportunism. A pension is deferred compensation that people work toward for decades before receiving. People cannot get these years back if they discover at retirement that the company has not funded the pension. By contrast, workers will quickly leave jobs when they do not get paid.
Employees need assurance that their pension plan is adequately funded. Public sector pensions are perhaps even more vulnerable as state legislatures can deliberately underfund the plan. Illinois’ “Edgar Ramp” illustrates this. Under Republican Gov. Jim Edgar in 1996, Illinois planned insufficient contributions for 15 years which afterward escalated to about one-third of state tax revenues. This may eventually drive Illinois into bankruptcy and lead to pension cuts for retirees.
The RSA under Bronner has held the Alabama Legislature to required contributions, even during budget crunches. And they have kept our elected representatives’ greedy hands off this $44 billion piggy bank.
If Alabama embraces ESAs, K-12 education may change enormously. Competition should improve learning outcomes, but could also create uncertainty as it’s likely many private schools will be created with some inevitably failing.
Concern over pensions or halting the accumulation of service years could dissuade teachers from taking jobs with these new schools. The enormous trust possessed by the RSA could prevent this. Private school participation in RSA might ensure teachers take jobs with startup schools.
School quality factors heavily in business site selection. Many red states Alabama competes against with for businesses have advanced school choice, and six states, including Florida, now offer universal ESAs. A recent Wall Street Journal piece even noted that Alabama is lagging on school choice.
Alabama consistently ranks near the bottom on the National Assessment of Educational Progress standardized tests. Economic research demonstrates that increased funding does not improve outcomes. Choice offers the best hope for educational improvement and supporting economic development. Put differently, RSA investment in Alabama could be undermined if school choice is not implemented in the state.
ESAs would radically alter public funding of education. But funding students as opposed to schools should change who should qualify for the state pension plan. Alabama can leverage the RSA’s stellar reputation to prevent pension worries from derailing competition in education.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University or the policy or position of 1819 News.
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