The Chart That Launched a Conference

February 24, 2009

 

The Quick and the Ed has additional comment on the teacher pension conference I discussed yesterday.  Rather than focusing on the financial sustainability of teacher pensions, Chad Aldeman at QATE focuses on how the odd accrual of pension wealth distorts teacher labor market decisions.  This is also an incredibly important issue.

In particular, he focuses on the work done by my colleagues Bob Costrell and Mike Podgusrky that finds that the convoluted design teacher pensions encourages some teachers to continue working to receive a large increase in the value of their pensions at a particular age, while it pushes other teachers out the door because they would lose an enormous amount of pension wealth if they continued working.

These “peaks and valleys” in pension wealth can have profound effects on teacher quality, by possibly keeping some teachers in the profession too long and by cutting the careers of others too short.  The chart above should give you a feeling for how convoluted teacher pension designs are.  Aldeman calls it “the chart that launched a conference” because the publication of these findings in Education Next sparked a flurry of new research on teacher pensions, much of which was presented last week.

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Posted by Jay P. Greene

Retiring at 55 While The Rest of You Work to Pay My Pension

November 20, 2008

Pictured above is a group of retired teachers celebrating in Georgia after they blocked efforts to change the automatic rate of increase in their pension benefits.  According to the Atlanta Journal Constitution, since 1969 teachers in Georgia have enjoyed twice-annual automatic increases of 1.5% in their pension benefits.  After losing $11 billion since July 1 in the $41 billion pension fund, Governor Sonny Perdue floated the idea that the rate of increase might need to vary depending on economic conditions.  No dice, said outraged teachers.  We paid in and are entitled to that money. 

Never mind that because teacher pensions are usually defined benefit plans, the amount they receive can be substantially more than what they paid in plus the return on that money.  This is especially true when the returns on investments have been lousy, as has been the case recently.  And if the pension funds come up short the taxpayer is on the hook to pay the benefits.  The angry teachers don’t care.  Gimme!

And politicians have incentives to promise too much in pension benefits because of electoral threats from teacher unions.  The AJC piece nicely documents the electoral pressure: “Steve Jackson, 62, a retired Villa Rica social studies teacher, held a sign at the entrance of the Retirement System Offices. It read ‘betrayal’ and ‘teachers never forget.’  ‘We feel like Sonny (Perdue) wouldn’t be governor without the teachers support,’ Jackson said. ‘He promised things to the teachers. We feel very betrayed.’”

Notice that Jackson is retired for we don’t know how long at the age of 62.  In fact, teachers in most states can retire with full benefits in their mid-fifties.  In Missouri, for example, a teacher can retire in her mid-fifties with 30 years of experience and receive 75% of her highest three years of salary (plus increases for inflation) for the remainder of her life.  And since a woman at the age of 55 can expect to live another 28 years, she can expect to receive pension benefits for about as many years as she worked.

Meanwhile, the rest of us have to work longer before retiring, both to compensate for losses we may have experience in our defined contribution plans and to pay the taxes to bail out the excessive promises made to teachers.  Just picture this:  there are people who will have to work well into their seventies to pay for teachers who retire in their mid-fifties.

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Posted by Jay P. Greene

Paying the Pension Piper

October 27, 2008

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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Posted by Jay P. Greene