Paying the Pension Piper

According to an analysis of public (including teacher) pensions by Northern Trust reported in the Washington Post, those pensions lost 14.8% of their value for the year ended September 30.  They have almost certainly lost more during October in line with the continuing drop in stock prices. 

The decline only compounds a serious problem.  Even before this year’s market fall many teacher pension plans were under-funded.  According to the Post, the GAO concluded that 27 out of 65 large public pensions were inadequately funded as of 2006.

The problem, according to pension administrators cited in the article, stems in part from “an increase in pension benefits.”  That is, when the market is doing great and pension funds are flush, state policymakers are tempted to accede to teacher demands to raise benefits.  But when the market drops, the pension benefits cannot be cut.  It’s a one-way street.  Pension benefits may be increased but it is illegal to decrease them.

So, guess who is going to have to pay the pension piper?  Taxpayers.

UPDATE:  Teacher pensions also distort the labor market for teachers by having “spikes” and “valleys” in benefits.  That is, teachers leave a large amount of money on the table if they leave their positions too early and they actually begin to lose pension benefits if they remain in their job too long.  The net effect is to keep some teachers who have lost their fire for teaching in the profession too long and to drive effective and experienced teachers out of the profession too early.  See a great piece on this by my colleagues Bob Costrell and Mike Podgursky in Education Next.

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