Benefit or Burden? On the Intergenerational Inequity of Teacher Pension Plans

Abstract

Most public school teachers in the United States are enrolled in defined benefit (DB) pension plans. Using administrative micro data from four states, combined with national pension funding data, we show these plans have accumulated substantial unfunded liabilitieseffectively debtowing to previous plan operations. On average across 49 state plans, an amount that exceeds 10 percent of current teachers' earnings is being set aside to pay for previously-accrued pension liabilities. To the extent that the costs of the unfunded liabilities drag on teacher compensation, they may exacerbate problems of teacher recruitment and retention. We briefly discuss three policy changes that could end or reduce the accumulation of unfunded liabilities in educator pension plans: (1) transition teachers to definedcontribution retirement plans, (2) transition teachers to cash-balance retirement plans, and (3) tighten the link between funding and benefit formulas within the current defined-benefit structure.

Retirement Choices by State and Local Public Sector Employees: The Role of Eligibility and Financial Incentives

“…More broadly, defined benefit payments in substantially underfunded plans have implications for intergenerational equity. For example, Backes et al (2016) estimate that on average across state plans, over 10 percent of current teachers' earnings are set aside for previously-accrued pension liabilities. As a public policy matter, it will be useful to understand the relative value participants place on aspects of these plans.…”

Labor market frictions and production efficiency in public schools

“…if a teacher leaves prior to vesting she loses all employer contributions to the pension plan on her behalf (Backes et al, 2016). Retirement eligibility also depends on in-system service and individuals who split time in more than one plan usually must work longer to become eligible to collect a pension (Costrell and Podgursky, 2010).…”

The trade-off between pension costs and salary expenditures in the public sector

“…Using data from the Bureau of Labor Statistics' National Compensation Survey, Costrell (2015) estimates that inflation-adjusted per-pupil pension costs paid by employers have more than doubled from $500 in 2004 to over $1,000 by 2015, on average. The cost increase is driven predominantly by rising unfunded liabilities (Backes et al ., 2016).…”

“…Backes et al . (2016) document that for new teachers as of 2015, the average per-worker cost of servicing the unfunded liability reported by state plans in the USA was just over 10% of salaries.…”