Another Pension Problem: Portability

Pensions can create enormous employment frictions when they are structured as unvested deferred compensation. This friction is often a bad thing, which is why the private employment sector generally sticks to 401k pensions, which are both fully portable and mostly vested throughout an individual’s employment.

The public sector, on the other hand, has preserved the worst characteristics of old-school pensions. Perhaps the best example comes from the persistently parochial public teacher unions, which bizarrely insist on defined-benefit pensions that do not vest at all for 20-30 years and do not port to any other employers. Bill McGurn expands on this today:

Because their pensions are not portable, teachers lose big if they move to another school system, switch careers, or try to cash out. [A recent report, Better Benefits: Reforming Teacher Pensions for a Changing Work Force,] cites a 2008 survey in which nearly four out of five teachers agreed with the statement that “too many veteran teachers who are burned out stay because they do not want to walk away from the benefits and service time they have accrued.”