Structure of Pension Plans May Warp Teacher Market, Research Says

By Michele McNeil
At a time when millions of baby-boomer teachers are nearing retirement, their decisions on when to leave the classroom are guided more by the early retirement incentives built into state pension plans than by educational considerations, according to new research by a pair of economists.

Those pension formulas devised by state legislatures encourage teachers to retire in their mid-50s, while penalizing them for teaching longer than that, states an article appearing in the Winter 2008 issue of the magazine Education Next.

The research by economics professors Robert M. Costrell, of the University of Arkansas, and Michael Podgursky, of the University of Missouri at Columbia, calls attention to the long-lasting consequences from what they view as outdated teacher pension systems. These systems, though they vary from state to state, have a common, fundamental flaw, the researchers say: They reward teachers who stay in the same job for 20-plus years, penalize them for teaching too long, and make it difficult for teachers to move to different states and different jobs.

The researchers advise that states must attack the problem head-on. If not, they warn, the teaching supply will be disrupted as more teachers retire than are hired; state and local district budgets will be strapped now that it’s time to start paying these lucrative pensions; and an intergenerational conflict will intensify between younger teachers who may get short-changed to pay for retirements and the veteran teachers who are the beneficiaries of this system.

“It is a real educational issue, and it’s going to force harsh trade-offs,” Mr. Costrell said, noting how difficult it is for teachers to move to different states because, as they start in their new school district, they also must usually start over in building up their pensions.

The problem also will plague states and districts trying to lure private-sector professionals into the teaching profession, the researchers said, especially those in mathematics and science, which are because they are highly compensated and in demand.

“The young teachers do not benefit from this system, but it’s going to be paid for out of their salaries,” Mr. Costrell said. “And, it’s going to make it more difficult to recruit mid-career switchers.”

‘Push and Pull’
The researchers describe a “push and pull” problem that results in giant spikes in retirement wealth that can happen at certain ages, or with certain years of service. The decision to retire at any given time can mean the difference in hundreds of thousands of dollars over the span of a teacher’s retirement. The researchers explain it by using examples from two states with different formulas.

In Ohio, a teacher with 24 years of service who wants to retire at age 49 gets a pension worth $315,000, but staying just another six years will escalate the value of the pension to $1 million. In Arkansas, a 53-year-old teacher with 28 years of teaching experience may want to keep teaching—but each year that teacher stays on the job, the teacher forgoes a year of pension payouts, and never recoups that amount. Still the teacher and school district keep contributing 20 percent of the teacher’s wages into the overall pension fund.

Though there is little empirical evidence to indicate just how these pension systems are affecting the teacher labor force, the researchers say existing studies indicate teachers respond to these kinds of incentives and disincentives.

“These are large sums of money, and you can’t be indifferent to that,” Mr. Costrell said.
Teacher retirement plans have not kept up with pension changes in the private sector. Most private-sector retirement plans are defined-contribution plans, in which workers and their employers contribute a certain percentage of wages to a retirement fund, which can transfer from job to job. There’s no guarantee of any regular retirement payouts or monthly checks.

That’s far different from teachers’ “defined-benefit” pension plans, in which retired educators are guaranteed a set amount of money throughout retirement, and in which contributions fund the overall pension system and are not tied directly to individual retirement checks.

The defined-benefit structure has created significant unfunded pension liabilities in teacher systems across the country, made worse when legislators respond to pressure from teachers’ unions and create early-retirement incentives that translate into several additional years of pension payouts by the retirement funds. Often, these changes are made when the stock market is roaring and the teacher retirement funds look richer, prompting legislators to sweeten the retirement pot for teachers, the researchers said.

“It’s easy to give away [such benefits],” said Mr. Podgursky. “But once you giveth, you can’t take it away.”
The solutions are complicated, and legislators have only nibbled around the edges. Some states, including Arkansas, have created plans in which teachers can stay in the classroom and collect their pensions, which are deposited in an individual retirement account until they retire. Some states, such as California, allow teachers to come back to their profession after a break—12 months, for example—or to work part time and not accrue additional benefits.

“There is a tendency to come at this in a piecemeal way,” Mr. Podgursky said. “Let’s re-examine this thing from top to bottom. That’s what we really think states need to be doing.”