Peaks, Cliffs, and Valleys: The Peculiar Incentives in Teacher Retirement Systems and Their Consequences for School Staffing

Abstract

This article examines the pattern of incentives for work versus retirement in six state teacher pension systems. We do this by examining the annual accrual of pension wealth from an additional year of work over a teacher's career. Accrual of wealth is highly nonlinear and heavily loaded at arbitrary years that would normally be considered mid-career. One typical pattern exhibits low accrual in early years, accelerating in the mid-to late fifties, followed by dramatic decline or even negative returns in years that are relatively young for retirement. Key factors in the defined benefit formulas that drive such patterns are identified along with likely consequences for employee behavior. The authors examine efficiency and equity consequences of these systems as well as options for reform.

Retirement Benefits and Teacher Retention: A Structural Modeling Approach

“…The legislation also curtailed rights of the CTU to bargain over key working conditions. Under the leadership of CEO Arne Duncan (2001-2009, more than 40 poorly performing and underattended schools closed, and over a dozen were designated for turnaround. Many turnaround schools were managed by private organizations following the school action, and many new charter schools opened during this period.…”

“…The research universally concludes that teachers' defined benefit retirement plans have particularly strong financial incentives tied to timing of exit from teaching. Costrell and Podgursky (2009) examine the annual accrual of pension wealth in six large teacher retirement systems-Ohio, Arkansas, California, Massachusetts, Missouri, and Texas-for a stylized teacher that enters teaching at age 25 and teaches continuously until exiting permanently. In all cases, teachers face sharply nonlinear pension wealth accrual schedules that provide large financial incentives to continue working to a specific age or for a certain number of years in the system.…”

Teacher Compensation and Collective Bargaining

“…There is nothing unique about California. Costrell and Podgursky (2009b) show that these spikes exist in other teacher DB plans. It is difficult to discern an efficiency rationale for these spikes in pension wealth accrual.…”

“…26 The teacher's earnings rise along a typical California salary schedule (Sacramento). For other details, see Costrell and Podgursky (2009b). 27 SASS includes private schools and teachers as well.…”

Three Essays on Teacher Labor Markets

“…Costrell and Podgursky (2009) and Friedberg and Turner (2010) describe how DB pensions "pull" teachers to stay mid-career, as their annuity grows with more experience and higher average salary. During times when a teacher is ineligible to receive pension benefits for many years, exiting is not an attractive option, as she would be without salary or annuity (from the North Carolina public school system) until she crosses an eligibility threshold; furthermore, she would be giving up large gains in pension wealth and her annuity would not be inflation-adjusted during the interim.…”