In the current issue of Education Next, Cory Koedel, Shawn Ni and I look at what school administrators get when they participate in teacher pension plans. A surprising finding, at least for us, was that the school administrators are the hands-down winners in that they reap the largest gains relative to contributions.
We examine this using the rules of the state teacher pension plan in Missouri. We compare the expected contributions and benefits for a typical novice teacher, senior teacher, school principal, and school superintendent. Details are in the article but here is a key finding: because they earn more, school principals can expect to contribute 14 percent more to the pension plan than a senior teacher would contribute over the course of a career. A school superintendent can expect to contribute 53 percent more. However, when we turn to benefits, the principal can expect to receive 37 percent more than the senior teacher, and the superintendent 89 percent more.
What explains this gap? Why are the administrator benefits so much larger than contributions? It turns out that this is the natural result of the most common type of teacher pension plan (known as final average salary (FAS) defined benefit plans). In an FAS plan, your retirement check is based not on your career average salary, but rather, on the average of several years of your highest salary (typically earned in your final years). Since school administrators work for many years as a teacher and then receive a substantial boost in pay at the back end of a career as they move into administration, they fare much better than a senior teacher.
Of course, the ones who fare worst of all are novice teachers. On entry, a new teacher can expect to contribute 30 percent of what a senior teacher does, but can only expect 18 percent of the benefits. This is the same math as seen in the administrator example but in reverse. For a new teacher, the contributions to a pension plan are front-loaded but the benefits are far in the future. For teachers who quit early in a career, these benefits are rarely collected.
Defined benefit pension plans don’t have to work this way. For example, Social Security is a defined benefit pension plan. However, unlike the typical teacher pension, your Social Security retirement check is based on 35 years of earnings, not the highest two or three years. It would be possible to design DB plans for educators in which retirement checks would reflect career average earnings. A “cash balance” DB plan would have this feature, and as a result would not penalize teachers who move from one state to another during a teaching career.
Given that administrators are the largest net beneficiaries of the current teacher pension system, it should come as no surprise that they are not at the barricades clamoring for change. This is unfortunate given the fact that the costs of current pension plans are a huge source of fiscal stress in many states, and that a more modern, mobile, and cheaper retirement benefit plan could better help public schools compete for academically talented young (and mobile) college graduates. School reformers need to understand that on the issue of pension reform, labor and management are likely to be on the same side of the bargaining table.