School Administrators Benefit the Most from Teacher Pension Plans
Beginning teachers subsidize handsome payoffs to superintendents, guardians of the public interest
The costs of retiree benefits for educators, including benefits for previous retirees, are consuming a large and growing share of public spending on K–12 education. Between 2004 and 2012, pension costs for public educators rose from 11.9 to 16.7 percent of salaries. Unfunded pension liabilities of state and local governments are estimated to be roughly $1 trillion. But that trillion-dollar number, as vast as it seems, understates the true liabilities, which more than double if calculated using standard methods in financial economics.
In spite of the need for pension reform as evidenced by Detroit’s recent bankruptcy filing, pension reform is unlikely, in part because administrators in charge of the system reap the largest benefits from it. The authors of a new Education Next study find that while superintendents contribute 53 percent more to pension plans over their career span than senior career teachers, their expected benefits upon retirement are 89 percent higher than those of teachers.
Authors Cory Koedel, Shawn Ni, and Michael Podgursky point out that using salary levels from the last three years of service to determine retirement benefits, “combined with the career-cycle timing of teachers’ promotions into administrative positions, results in senior management in K–12 education enjoying the largest net benefits from these plans.” Educators’ defined-benefit plans typically provide retirees with guaranteed lifetime benefits, with the annual payout based on the number of years of service and annual salary in the final years of active employment. The article, “The School Administrator Payoff from Teacher Pensions” can be found on www.educationnext.org and will appear in the Fall 2013 issue of Education Next.
In Missouri and other states, the authors note, “the pension system transfers wealth from lower-income professionals to higher-income professionals. Beginning teachers are subsidizing a handsome payoff to better-paid administrators, who are the appointed guardians of the public interest in the education system.” For example, a principal’s contributions are only 14 percent higher than those of senior career teachers, but their expected benefits are 37 percent higher. At the opposite end of the spectrum, because of turnover and mobility, a young teacher can expect to contribute 30 percent of what typical career teachers contribute, but he or she can expect to collect only 18 percent of the benefits.
As senior-level administrators are both the stewards of the pension system and the recipients of the highest net benefits, the authors conclude, “There is no reason to expect school administrators or their organizations to support reforms that would provide a more modern and mobile retirement system for young educators” and suggest that districts could be recruiting young teachers more effectively by putting money in upfront salaries rather than in end-of-career pension benefits.
About the Authors
Cory Koedel is assistant professor of economics, and Shawn Ni, and Michael Podgursky are professors of economics at the University of Missouri, Columbia. The authors are available for interviews.
About Education Next
Education Next is a scholarly journal published by the Hoover Institution that is committed to careful examination of evidence relating to school reform. Other sponsoring institutions are the Program on Education Policy and Governance at Harvard University, part of the Taubman Center for State and Local Government at the Harvard Kennedy School, and the Thomas B. Fordham Foundation. For more information about Education Next, please visit: https://www.educationnext.org.