Teacher Pensions: What Is To Be Done?

By Education Next 08/30/2011

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States owe hundreds of millions of dollars to teacher pension funds. In a new forum published in Education Next, three professors debate how serious the crisis is and what the appropriate response is.

“The states’ fiscal crisis necessitates that they address pension underfunding,” writes Christian Weller of the University of Massachusetts-Boston, but the problem is manageable, and states will have several decades to come up with the money.

Christian Weller

But Robert Costrell of the University of Arkansas and Michael Podgursky of the University of Missouri argue that the situation is more serious, but that it offers an opportunity for real reform. However, Costrell and Podgursky also worry that some states are responding in ways – such as reducing benefits for new teachers– that worsen the problem.

Costrell and Podgursky argue that the current system of teacher pensions has structural problems that result in a) perverse incentives for teachers to stay on the job when they are no longer effective or to quit too early, b) huge penalties for job mobility, and c) very large transfers of wealth from young teachers working short spells to long termers who work full careers in the same system.

Robert Costrell

They believe that current teacher pension plans, which are mostly defined benefit (DB) plans, should be replaced by defined contribution (DC) or cash balance (CB) plans.

They write

As states grapple with the current pension crisis, a window of opportunity is open to implement more modern and strategic plans, or to make matters worse.

Christian Weller believes that states may want to spread out the pain of addressing pension plan underfunding so that not only new teachers are affected, and that states might set a floor under employer pension contributions to prevent underfunding in the future. However, he argues that switching from defined benefit pensions to alternative benefits (DC or CB plans) would have several harmful effects.

Michael Podgursky

Weller believes that average teacher effectiveness will likely decline under alternative benefits because of higher turnover among more experienced teachers, who will no longer have the security of a defined benefit pension to help inspire their loyalty.

Weller writes that switching to alternative benefits will also be costly. He concludes

The proposal to use the current crisis as an opportunity to switch retirement plans…will leave states with a much less efficient compensation system.

Podgursky and Costrell challenge Weller’s contention that a shift in pension plans would cause average teacher effectiveness to fall.

The full debate can be found at “Fixing Teacher Pensions: Is it enough to adjust existing plans?” which will appear in the Fall 2011 issue of Education Next.

For more on teacher pensions by Michael Podgursky and Robert Costrell, please see “Golden Handcuffs: Teachers who change jobs or move pay a high price” from the Winter 2010 issue of Education Next, and “Peaks, Cliffs, and Valleys: The peculiar incentives of teacher pensions” from the Winter 2008 issue of Education Next.

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