In a letter to the editor written in response to our article, Beth Almeida of the National Institute on Retirement Security takes us to task for describing this phenomenon as “redistribution,” noting that such a practice is illegal.   We are not lawyers, so we’ll take her word on that.   And since we don’t want to get pension and teacher union officials in trouble, we have a modest proposal, inspired by Professor Alfred Kahn, President Carter’s anti-inflation czar.   In the late 1970’s Professor Kahn was taken to task by his boss and his political advisors for talking about a “recession.”  So in public discussions Kahn started talking about a “banana” instead, at one point warning:  “We’re in danger of having the worst banana in 45 years.”

It is in the spirit of Professor Kahn that we offer Figure 1, which illustrates the bananas for our two Missouri teachers.  The teacher who stays on the job for 30 years, until age 55, receives far more in net pension benefits than has been contributed on her behalf — a positive banana.   By contrast, a teacher who puts in ten years, leaving at age 35, receives far less than has been contributed — a negative banana.

For the Ed Next article, we summed up the positive and negative bananas across all teachers entering at age 25 in Missouri. We estimate that 46 percent of their pension wealth gets banana-ed from those leaving teaching early (average age 37) to those leaving later (average age 54). In the article we note that the size of the average banana ranges from a high of 61 percent of an entering cohort’s pension wealth in Massachusetts to a low of 36 percent in California.

In our writings about teacher pensions over the last few years, we’ve identified a lot of bananas.   It has also become clear that bananas are an important issue in reforming these systems.   We think it’s important to start this policy discussion.  Just make sure you avoid the “r” word and choose a popular fruit or vegetable instead.

NB: We respond to some of Almeida’s other arguments here.

The ongoing global financial crisis is forcing many employers, from General Motors to local general stores, to take a hard look at the costs of the compensation packages they offer employees. For public school systems, this will entail a consideration of fringe benefit costs, which in recent years have become an increasingly important component of teacher compensation. During the 2005–06 school year, the most recent year for which U.S. Department of Education data are available, the nation’s public schools spent $187 billion in salaries and $59 billion in benefits for instructional personnel. Total benefits added about 32 percent to salaries, up from 25 percent in 1999–2000. The increase reflects the well-known rise in health insurance costs, but it also appears to include growing costs of retirement benefits, which have received much less attention.

Conventional wisdom holds that teacher pensions (along with other public pensions) are more costly than private retirement benefits, for reasons dating to an earlier era of low teacher salaries over lifelong careers. In spite of dissent from this view by some researchers (see sidebar), in this case we find that conventional wisdom is right: the cost of retirement benefits for teachers is higher than for private-sector professionals.

To track changes in retirement costs and compare employer contributions to retirement for public school teachers with those for private-sector professionals, we draw on recent data from a major employer survey conducted by the U.S. Department of Labor. These data show that the rate of employer contributions to retirement benefits for public school teachers in 2008 is substantially higher than for private professionals: 14.6 percent of earnings for teachers vs. 10.4 percent for private professionals. Moreover, the gap has widened over the four years the data have been available. Between March 2004 and September 2008, the difference more than doubled, rising from 1.9 to 4.2 percentage points (see Figure 1).

There are several reasons one might expect employer contributions to retirement to be higher for teachers. First, nearly all teachers are covered by traditional defined benefit (DB) pension plans, in which employees receive a regular retirement check based on a legislatively determined formula. These plans have, over the years, come to offer retirement at relatively young ages, at a rate that replaces a substantial portion of final salary. U.S. Department of Education data show a median retirement age for public school teachers of 58 years, compared to about 62 for the labor force as a whole. A teacher in her mid-50s who has worked for 30 years under a typical teacher pension plan will be entitled to an annuity at retirement of between 60 and 75 percent of her final salary. In nearly all plans this annuity has some sort of cost-of-living adjustment. One does not generally observe comparable retirement plans for professionals and lower-tier managers in the private sector, since most employers have replaced traditional DB plans with defined contribution (DC) or similar 401(k)-type plans, in which the employer and employee contribute to a retirement account that belongs to the employee. Nor do those traditional DB plans that remain typically reward retirement at such early ages; they more nearly resemble Social Security, where eligibility is age 62 for early retirement, and 66 and rising for normal retirement.

The Survey Data

Our analysis draws on data from the National Compensation Survey (NCS), an employer survey developed by the Bureau of Labor Statistics (BLS). The NCS survey is designed to measure employer costs for wages and salaries and fringe benefits across a wide range of occupations and industries in the public and private sectors. Although the BLS has been reporting quarterly fringe-benefit cost data for various public and private employee groups for more than a decade, only since March 2004 has the bureau broken out these fringe-benefit cost data for public school K–12 teachers. In this article we use those data to compare retirement benefit costs for public K–12 teachers with costs for private-sector professionals. We use the most detailed available private-sector comparison group, “management, professional, and related,” a category that includes business and financial managers, operations specialists, accountants and auditors, computer programmers and analysts, engineers, lawyers, physicians, and nurses.

We measure the cost of retirement benefits as a percentage of earnings. Virtually all states specify in law that the employer will contribute a certain percentage of teacher salaries to a DB pension fund (employee contributions are similarly specified), and it is commonplace to compare such contribution rates among the states. Similarly, private-sector employers offering DC plans will typically specify their contribution as a percentage of salary (often as a match to employee contributions). Unlike some other benefits (e.g., health insurance), if salaries change, the dollar costs for retirement benefits move proportionally. On the benefit side, the DB formula ties one’s starting annuity to final average salary, while the adequacy of a DC plan is commonly thought of in terms of the salary replacement rate. Thus it is natural to specify retirement costs as a percentage of salary, both for teachers and for private-sector professionals.

In making this comparison, we must account for the fact that, while all of the private-sector professionals are covered by Social Security, a number of public school teachers are not. Some of the higher cost of employer retirement plans for teachers is offset by lower employer contributions for Social Security benefits. Thus, we should compare the contribution rates for employer-provided retirement benefits and Social Security for both groups of workers. While the BLS reports the Social Security contribution rate for private professionals, it does not report a similar rate for teachers. However, we are able to make such an adjustment by multiplying the share of teachers covered by Social Security, which the BLS estimates to be 73 percent, times the employer contribution rate (6.2 percent). This assumes that the vast majority of teachers are below the Social Security earnings cap (currently $102,000) and that the share of teachers in Social Security has been steady over the four years for which we make the comparison.

A time series with quarterly data for these benefit percentages is reported in Figure 1. Two patterns are visible. First, the contribution rate is considerably higher for public school teachers than for private professionals. In the most recent quarter for which data are reported, ending September 2008, the employer contribution rate for public K–12 teachers (14.6 percent) was 4.2 points higher than that for private-sector professionals (10.4 percent). Second, the gap is widening. While the private sector contribution rate has been relatively flat over the four years, the rate for public school teachers has markedly increased, doubling the gap between them from one-fifth to two-fifths.

In one important respect, it is likely that the BLS data underestimate the cost of retirement benefits for public school teachers. Many public school districts (and some states) provide health insurance benefits for retired public school teachers. In the course of this research we were surprised to learn that retiree health insurance benefits are not included in the BLS employment cost estimates. Since private employers have largely eliminated this benefit, this means that our estimate of the gap in retirement benefits favoring public school teachers is low, although we cannot be sure of the extent of the underestimate.

Social Security and Teachers

While the overall employer contribution rate for public school teachers is higher than for private-sector professionals, the group average may mask differences between teachers who are and are not covered by Social Security. In order to assess this point empirically, we examined directly the data on employer contributions for teacher pension funds. We find that total employer contributions for both groups of public school teachers are higher than for private-sector professionals.

Most teachers are in statewide pension funds, with a relatively small number in district funds (e.g., New York City, Denver, St. Louis). Data on employer contributions for these plans are available in annual financial reports for each fund, which are surveyed by the National Association of State Retirement Administrators (NASRA).

Using data on contributions from NASRA and pension fund annual reports where necessary, and using weights based on the number of teachers employed in each state or district as reported in the NCES Common Core of Data, it is possible to compute average employer contribution rates for teachers. First we consider teachers who are in states and districts covered by Social Security. For these teachers, we calculate the weighted average employer contribution to be 9 percent of earnings. This can be compared to the estimate of employer contributions to retirement for private-sector professionals and managers, calculated from the BLS data as 4.7 percent for the comparable period (FY07). This is a 4.3 percent difference favoring public school teachers, almost double, in those states and districts where teachers are enrolled in Social Security, so the comparison is on an equal footing.

For states and districts where teachers are not in Social Security, we calculate the average employer contribution at 11.1 percent of earnings. Of course, this is considerably higher than the 4.7 percent retirement contributions for private-sector professionals, but, perhaps surprisingly, it even exceeds their employers’ combined contributions to retirement and Social Security, which averaged 10.3 percent for FY07. Thus, as Figure 2 shows, comparing teachers with professionals in private-sector employment, total employer contributions are higher for teachers whether or not they are also covered by Social Security.

Our analysis of evidence from the BLS National Compensation Survey and the NASRA Public Fund Survey shows that the employer contribution rates for public school teachers are a larger percentage of earnings than for private-sector professionals and managers, whether or not we take account of teacher coverage under Social Security. In addition, the BLS data show that the contribution rate for teachers is clearly trending upward.

Looking Ahead

What are the likely trends going forward for the cost of teacher retirement benefits? No one knows for sure, but we can identify the two key factors that will drive these costs: future developments in the benefits themselves and in their funding. The trend through much of the postwar period was to enhance the retirement formulas in various ways, including reducing the age or service requirement for full benefits. For example, just last year New York City agreed to enhance its pension formula for younger teachers. But there is evidence that benefit enhancement has generally abated in recent years. There are even a few states, including Texas, that have moved to reduce benefits for newly hired teachers. However, this is unlikely to reduce costs in the near future, since benefits for incumbent teachers are protected by law in most states.

The other factor to consider is the funding status of teacher pension plans. The vast majority of teacher pension plans are not fully funded. This means that contributions include both the “normal cost” of pension liabilities accruing to current employees and the legacy costs of amortizing unfunded liabilities accrued previously (due to a variety of reasons, including the original pay-as-you go nature of most plans, as well as unfunded benefit enhancements over the years). In theory, if the actuarial assumptions hold true going forward and no new benefits are enacted, the amortization costs will eventually disappear (after 30 years, under a typical funding schedule), in much the same way that a homeowner’s monthly expenses decline when the mortgage gets paid off.

However, the near-term prospects may be very different. For one thing, public pension funds face the possibility of important accounting changes. Unlike private pension funds, public fund actuaries have been allowed to discount future liabilities at a rate of about 8 percent, the assumed long-run market return on fund assets. Finance economists have argued that such a high discount rate is imprudent, however, and there have been signs that public accounting standards might move toward the private-sector rules, based on corporate bond and Treasury rates, which could reduce the discount rate to about 5 percent. This would dramatically raise the required amortization payments.

Finally, it bears noting that the market value of pension funds has fallen precipitously as of this writing (December 2008). Barring a major market recovery, pension funds across the country will have new, large unfunded liabilities. Under actuarial smoothing methods, these losses will be phased in, raising required amortization payments over the next few years. If the accounting rules for public funds also change, reducing the discount rate on liabilities, the employers of public school teachers, along with other public employers, will face a double hit, requiring sharp increases in contributions. By contrast, those private employers who have switched over to defined contribution plans in recent decades will be unaffected. In short, there are good reasons to believe that the contribution gap we have documented will continue to widen in coming years.

Robert M. Costrell is professor of education reform and economics at the University of Arkansas. Michael Podgursky is professor of economics at the University of Missouri–Columbia.

For more than a decade, debate over reform of public pensions — including teachers — has been in a rut.   On one side, some reformers have favored scrapping traditional teacher pension plans (defined benefit, or DB, of the “final average salary” type) in favor of the IRA-type plans received by most  private-sector professionals (defined contribution, DC).    On the other side, teacher unions, retiree groups, and DB pension plan professionals fight hard to protect existing plans.

Each side has legitimate points.

The critics of DB are correct that current plans are seriously underfunded in part because benefits are not tied to contributions.   This makes plans vulnerable to gaming and juicing up of benefits formulae when stock market returns are good, which, of course, leaves the taxpayers and employers holding the bag when stock market returns turn south.

DB advocates are correct in that a movement from DB to DC can shift investment risks from employers to teachers.   Last year’s stock market meltdown, which left many private sector professionals near retirement with inadequate savings, illustrates the problems associated with shifting these risks to employees.   Moreover, DB advocates argue, many educators lack the expertise or interest to make efficient retirement portfolio planning decisions, and will make poor choices, while running up large fees in the process.

In two articles in Education Next, we have highlighted a different set of problems with most teacher pension plans.  (The most recent article, “Golden Handcuffs,” was published today on the Ed Next website.) As currently configured, these plans create peculiar backloaded incentives that punish mobile teachers and push career teachers into retirement at relatively young ages. One of the key features that create these peculiarities is retirement eligibility rules that disproportionately reward the attainment of certain service benchmarks, such as “25-and-out” rules that encourage teachers to remain in the classroom for 25 years and then retire immediately thereafter.  Another feature is the loss of employer contributions for teachers who leave before vesting.  Removing the perverse incentives embedded in teacher pension plans could help to boost teacher quality by making the field more attractive to teachers with more varied career paths.

What those who are butting heads over DB vs. DC pensions may not realize is that there are other pension reform options besides the traditional DB and DC plans that can go some way toward addressing the concerns of both groups, and also alleviate the  problems we identify with regard to mobility and retirement rules.   For example, in our new article “Golden Handcuffs,” we illustrate how pension wealth would smoothly accrue under a “cash balance” (CB) plan of the type that has commonly been adopted in the private sector, and also a few places in the public sector.   As with most current plans, educators and employers would make regular contributions.   The pension fund would guarantee a fixed return on these contributions (which makes it a DB plan, both logically and legally).  Each educator would get a notional account in the fund.  This would grow each year based on the fixed return and new contributions (which makes it look similar to DC plans, except without the investment risk).   When the educator chooses to retire, these returns could be converted into an annuity, just as in current DB plans, to make sure no one risks outliving their retirement savings.

There are two key points to note.   First, and most important, investment risk and money management costs stay with the employer, which should please the advocates of DB plans.   The pension fund would invest these funds and guarantee the return to the educator.  Second, there would no longer be “peaks” and “valleys” in pension wealth accrual – one year would be the same as any other as far as pension wealth accrual is concerned.   Unlike a DB plan, however, when teachers quit, the employer contributions would remain in the plan, and would continue to earn the fixed return until the educator chooses to retire.

Such a plan would help address many of the concerns of DB critics as well.   Since the final annuity is directly tied to the history of employee and employer contributions and not the just the last few years of earnings, as in current plans, it is harder to game.  Indeed, it is quite transparent for all to see how much has been contributed on the educator’s behalf.   In addition, the mobility costs described in “Golden Handcuffs” would disappear or be greatly reduced.   Teaching professionals who move from one state to another in the course of a teaching career would not suffer devastating losses in pension wealth as they do in the current system.

There would, of course, be issues to debate.   The degree of generosity can vary, depending both on the employer contribution rate and the guaranteed rate of return.  And the fund managers may still make overly risky investments that can leave the plan underfunded, although one suspects there will be less temptation to do so if the guaranteed return approximates the rate on risk-free investments, as is typically the case.

But the key point to understand is that there is nothing inherent in DB plans that require they have the peculiar incentives and penalties that we currently observe.   It is possible to design DB plans that keep the investment risk with the employer, but allow smoother and fairer accrual of pension wealth for educators.

The costs of current teacher pension plans are rising rapidly and their sustainability is in question.   This is forcing policymakers to consider changes and reforms.   In thinking about reform, it is important for policymakers to understand that the DB versus DC – either/or — dichotomy is not helpful.   As we have seen, CB plans have features of both.  In addition, there is a continuum of options available that includes hybrids of various sorts, with components of CB, DC, and traditional final average salary plans .  Indeed, why require that one size fits all?   Some teachers may want the freedom to invest at least some of their own funds, and hybrid plans such as TIAA-CREF, which include DC options, as well as CB-type of guaranteed-return funds with annuitization, offer such flexibility.

Actuaries are quite well aware of our main point here: that DB plans, which keep investment risk with the employer, need not generate peculiar incentives and uneven distribution of pension wealth.   Concerning the accrual of pension wealth, one actuary noted – “you can make the lines look however you want.”     And “how the lines look” should be a central focus of reform discussions.   What type of deferred compensation plan (and associated pension wealth accrual) is the best way to recruit, retain, and motivate a high quality teaching workforce?

NB: You can listen to a new Ed Next podcast in which we discuss teacher pension reform here and you can watch an interview about the ways that teacher pension plans punish short-term and mobile teachers and reward teachers who spend their entire career teaching in one state here.

Listen to the Podcast

Economists Bob Costrell of the University of Arkansas and Mike Podgursky of the University of Missouri are the authors of “Golden Handcuffs,” an article in the Winter 2010 issue of Education Next that looks at the high price paid in pension wealth by teachers who change jobs.

As Bob and Mike note in their article, many states are being forced to reevaluate their teacher pension plans. The unfunded liabilities of these plans are in the billions. But while most analysts are focused on the enormous cost of teacher pensions and their long-term sustainability, Bob and Mike have been looking at another aspect of teacher pensions: the perverse incentives embedded in these plans that interfere with the goal of attracting and retaining outstanding teachers. In this podcast, they talk about the findings of their most recent study, which examines the way that teacher pension systems concentrate benefits on those teachers who spend their entire careers in a single state, and punish teachers who are more mobile.

Podcast: Robert Costrell and Michael Podgursky talk with Education Next.

An unabridged version of this article is available here.

Teacher pensions consume a substantial portion of school budgets. If relatively generous pensions help attract effective teachers, the expense might be justified. But new evidence suggests that current pension systems, by concentrating benefits on teachers who spend their entire careers in a single state and penalizing mobile teachers, may exacerbate the challenge of attracting to teaching young workers, who change jobs and move more often than did previous generations.

The design of teacher pension plans is a timely concern: like other public pension plans, those for teachers are becoming more costly. Employer contributions to pension funds tack on a larger percentage of earnings for public school teachers than for private-sector managers and professionals, and this gap is widening (see “Teacher Retirement Benefits,” research, Spring 2009, Figure 1). Those data do not yet reflect the impact of the stock market decline since 2007: the drop in the value of pension funds means further increases in employer contributions will be required to fund promised benefits. As fiscal concerns force states to reevaluate the costs of teacher pension plans, officials might also consider the plans’ consequences for teacher quality.

In earlier work we highlighted the peculiar incentives for retirement built into these plans (see “Peaks, Cliffs, and Valleys,” features, Winter 2008). Most plans create large spikes in pension wealth accumulation for teachers in their 50s. These spikes act as an incentive for teachers to stay in the classroom until their pension wealth reaches its peak and then push them into retirement shortly thereafter, as pension wealth accumulation turns negative.

We now extend this line of research by focusing on the distribution of pension benefits among teachers of varying career lengths and the penalties for those who switch systems. We examine pension formulas in six state plans and develop measures of the redistribution of pension wealth from teachers who separate early to those who separate later. We compare existing defined benefit (DB) teacher pension systems to fiscally equivalent systems that treat all teachers equally and find that the former often redistribute about half the pension wealth of an entering cohort of teachers to those who separate in their mid-50s from those who leave the system earlier. We then show that this back loading produces very large losses in pension wealth for mobile teachers. Compared to a teacher who has worked 30 years in a single state system, a teacher who has put in the same years but split them between two systems will often lose well over one-half of her pension wealth. It is difficult to justify such a system of rewards and penalties on grounds related to fairness or teacher quality.

Teacher Pensions 101

Public school teachers are almost universally covered by traditional defined benefit pension systems. In such a system, the employer has an obligation to provide a regular retirement check to employees upon their retirement. Typically, a DB teacher pension plan requires that both teachers and employers make a contribution each year to a pension trust fund. The salient characteristic of a traditional DB system is that for any individual, benefits are not tied to contributions.

More specifically, once a teacher is “vested” (usually after 5 or 10 years), she becomes eligible to receive a pension upon reaching a certain age or length of service. These eligibility rules vary across states, but they typically allow a teacher to draw a pension well before age 65, especially if she has been working since her mid-20s. Benefits at retirement are usually determined by a formula that takes into account years of service and the final average salary (FAS), which is an average of the last few years of salary (typically three). In Missouri, for example, teachers eligible for normal retirement earn 2.5 percent (the “multiplier”) for each year of teaching service. Thus, a teacher with 30 years of service would earn 75 percent of the final average salary. So if the FAS were $60,000, she would receive $45,000 every year for the rest of her life. If the teacher were to separate from service prior to being eligible to receive the pension, the first payment would be deferred and the amount of the pension would be frozen until that time. Once the pension payments begin, there is typically some form of inflation adjustment, although the specifics again vary from state to state.

We examined teacher pension plans in six states. While the states were not randomly chosen (we inhabit two of them), their plans are indicative of many teacher pension plans. Because the composite effect of each system is hard to discern by simply looking at the benefit formula, we examine patterns of pension wealth accumulation by age of separation.

Calculating Pension Wealth

We use the benefit formulas of pension plans to estimate the pension wealth of individual teachers. When an individual retires under a DB plan, she is entitled to a stream of payments that has a lump-sum value that we calculate using standard actuarial methods (which take into account expected mortality patterns and adjust the sum of payments to reflect the fact that they are received over many years rather than at a single point in time).

The heavy S-shaped curve in Figure 1 depicts pension wealth (net of employee contributions) for 25-year-old entrants to the Missouri teaching force who work continuously until they leave teaching at various ages. The salary schedule assumed is that of the state capital (Jefferson City), under which teachers receive experience-based salary increases and are also paid more if they have a master’s degree. The accumulation of pension wealth is not smooth and steady, but rises with fits and starts, due to rules of eligibility for early retirement and the like. In Missouri, after vesting at five years, a teacher is eligible for a pension at age 60. Her pension wealth—the current value of those deferred benefits—grows fairly steadily until age 45. The curve becomes steeper at age 46 because of a provision that allows teachers to begin collecting a pension when their age and years of service sum to 80, which brings her pension forward to age 59 and earlier. Then there is a big jump at age 50, because the 25th year of service makes a teacher eligible for an immediate pension (albeit with a reduced multiplier). Growth in pension wealth continues to be rapid in subsequent years as the multiplier is increased to its “normal” rate of 2.5 percent. Then, following a final bump in the benefit formula’s generosity at 31 years of service (age 56), net pension wealth starts shrinking. As is evident, complex pension rules lead to pension wealth curves that are irregularly shaped and bear no resemblance to the smoothly growing cumulative value of contributions.

(Pension) Wealth Redistribution

The result of these complex pension rules is that teachers who leave the profession in their 50s receive more pension wealth (as a percentage of cumulative earnings) than those who separate earlier. To develop a measure of the resulting redistribution, we compare existing DB systems to a fiscally equivalent plan where pension wealth is neutrally distributed: a cash balance (CB) system. CB systems calculate employee retirement benefits based on the cumulative contributions, with a guaranteed rate of return. Thus, pension wealth is a fixed percentage of cumulative earnings, regardless of retirement age.

In dollar terms, pension wealth grows smoothly under a CB system. Figure 1 compares the accrual of pension wealth under Missouri’s DB plan (the S-shaped curve) with the smooth accrual under a hypothetical CB plan. This diagram readily illustrates the redistribution of pension wealth toward those who retire in their 50s from those who leave teaching earlier. Teachers who retire before age 49 in Missouri receive less pension wealth than they would under a CB plan, while teachers who retire later receive considerably more.

We have developed a numerical measurement of this redistribution. Specifically, to compare net pension wealth across different ages of separation, we measure it at a fixed point in time, and we also estimate the frequency of separations at different ages. In this fashion, we can calculate weighted averages of net pension wealth for winners, losers, and the whole cohort of 25-year-old entrants. When we compare the Missouri plan to the fiscally equivalent CB plan, we find that 46 percent of pension wealth is redistributed from those leaving teaching at an average age of 36.6 to those separating at an average age of 54.2.

We made the same calculations of the distributional impact of the DB plans in the other states. In all states, the degree of redistribution is substantial. In Massachusetts, for example, average pension wealth is low, but 61 percent of it is redistributed. The degree of redistribution is also relatively high in Ohio (49 percent) and Texas (47 percent, for new hires), while it is somewhat lower in Arkansas (39 percent) and California (36 percent). As in Missouri, the redistributive gains are concentrated among those who retire in their 50s, while the losses are dispersed among all early leavers. This pattern holds particularly true for Massachusetts, where the gains are concentrated among just one-fifth of the cohort.

To summarize, there is significant variation among states in the magnitude of the gains and losses compared to a simple CB system, but all states redistribute net pension wealth to a substantial degree to those who retire in their 50s (after about 30 years of service) from those who leave a teaching position after shorter periods. In addition to the issue of equity, this has serious implications for teacher mobility, to which we now turn.

Moving Costs

It is well understood that DB pension plans penalize mobility, yet the sources of these costs are rarely delineated or quantified in a systematic way. There are several factors that reduce pension wealth when a teacher moves. First, teachers who leave a system before they are vested have no claim on a pension. Upon termination, or shortly thereafter, any teacher contributions are returned with interest (the rate varies, and can be well below market), but the teacher does not receive employer contributions. This is a major source of loss for many young teachers, since most teacher pension systems have a vesting period of five years or longer and the vast majority of early-career teacher turnover occurs in the first five years on the job. In fact, nine states have a 10-year vesting period for teachers. With such long vesting windows, many teachers will receive no employer contributions toward retirement as a result of their work in the classroom.

Although the effects of these vesting windows are large, they are at least fairly transparent for young teachers. This information is routinely provided to those newly hired. Even for teachers who are vested, however, there remain potentially large costs from mobility, and these are less obvious. One cost comes from the fact that teacher DB pensions are all based on final average salary. When a teacher leaves the profession before normal retirement age, the value of her annuity is tied to her salary at the time of her separation. No adjustment is made for ensuing salary growth or inflation.

Other costs to mobility arise from the service eligibility rules for normal and early retirement. Teachers who separate from a plan with, say, fewer than 20 years of service will often not be able to begin collecting their pensions until much later than teachers who remain in the plan until they meet eligibility requirements. At any given age, pension wealth is therefore lower for the mobile teacher—who has left one system early and entered another system late—simply because she can expect to collect fewer pension checks. Alternatively, she may be able to draw her pension at the same time as the teacher who stays in one system, but with a penalty. Either way, the costs are substantial.

Switching Systems

Pension wealth calculations similar to those above provide a comprehensive method for evaluating the costs of mobility. Specifically, let us continue to examine the pension wealth of a hypothetical teacher who enters at age 25 and works continuously. However, now, rather than working continuously in the same system, at age 40, after 15 years in state A, she moves to state B, which has the same pension formula and same pay grid, and ultimately retires. We assume that she collects two pensions, one in each of the states in which she worked. The pure mobility cost can be thought of as the loss from moving at age 40 to an identical state, but with zero creditable service.

The hypothetical wealth trajectory described above is depicted as the dotted curve in Figure 1 for Missouri. As discussed above, the heavy solid curve illustrates net pension wealth for continuous service under the DB plan, evaluated at date of separation. The dotted segment represents the wealth trajectory for a teacher who moves after 15 years, at age 40, diverging at that point from the solid curve for the teacher who stays. For the first five years, the dotted curve is flat since the teacher must get vested in the new system. After vesting, the teacher is entitled to two pensions, one from the old job and one from the new one. However, the loss from mobility continues to widen in the following years, as the teacher who stays becomes eligible for earlier and earlier retirement, while the teacher who moves does not earn enough service credit to advance the pension from age 60.

Under a continuous career, our hypothetical teacher would obtain 30 years of service by age 55, qualifying her for “normal” retirement benefits immediately at 75 percent of final average salary. This is worth $626,088 at age 55. The split career of the mobile teacher means that she receives two annuities, each of which is for 37.5 percent of final average salary, but the FAS for the first pension is of course much lower. In addition, neither the first nor the second pension would be drawn until “normal” retirement at age 60. This means that five years of pension payments are lost. These two factors together reduce the net pension wealth to $219,163, a loss from mobility of $406,925. This is the gap between the dotted and solid curves in Figure 1 at age 55. The cost of mobility is 65 percent of pension wealth.

By contrast, under the hypothetical cash balance system, also depicted in Figure 1, there is no loss from mobility. Net pension wealth, the cumulative value of employer contributions, is a constant percentage of cumulative earnings, regardless of whether they accrue in one job or two.

Table 1 provides summary calculations of these mobility losses for all six states. A glance down the first column shows substantial mobility costs in all six states, ranging from approximately $200,000 to more than $500,000. As the table also shows, these losses are large in relative terms as well, ranging from 41 percent to 74 percent of net pension wealth for teachers who stay.

Figure 2 depicts the sources of these losses, as well as the variation across states. For each state, the full bar gives the net pension wealth of a teacher who stays in the system to age 55, and the bottom portion, in black, is that of the mobile teacher. The middle portion gives the loss from mobility due to freezing FAS on her first job. The top portion gives the mobility cost imposed by service eligibility rules. Specifically, splitting 30 years of service credit between two jobs delays the first pension draw and can also affect the replacement rate (the annual pension as a percentage of FAS).

The costs from the split in service credit are generally large and vary across states. In Missouri, Arkansas, and Ohio, these rules lead to a delay of first pension draw from age 55 to 60, while in California, the first draw is delayed to age 57. In Texas, the mobile teacher delays first draw to 63, but she gains a higher replacement rate as a result. In Massachusetts, there is no delay for first draw, but the mobile teacher sacrifices a large increase in the replacement rate that is awarded to 30-year veterans. All in all, the service eligibility rules for early retirement, pension bumps, and the like—little known to the general public (and, we suspect, to many young teachers)—can impose large costs on teachers who move.

Final Considerations

Our work offers the first detailed analysis of the distribution of net pension benefits among teachers of varying ages of separation and the corresponding costs that teacher pension systems impose on mobile teachers. We find that in a typical DB system, compared to a neutral system, half an entering cohort’s pension wealth is redistributed to teachers who separate in their 50s, from those who separate earlier. One of the main reasons is that teachers who teach into their 50s can start collecting a pension immediately, while teachers who leave earlier often must defer their pension until age 60 or later, so they collect fewer payments over their retirement.

This inequality in benefits produces very large losses in pension wealth for mobile teachers. We estimate that teachers who split a 30-year career between two pension plans often retire with less than half the pension wealth accrued by teachers who complete a similar career in a single system. Again, one of the main reasons is that teachers who split their career often cannot begin collecting pension payments as early as those who stay in one system.

Our discussion has focused on teachers. However, the problems we have identified extend to other professional staff in public schools. School administrators are always included in teacher retirement systems. The market for administrators in urban school districts is increasingly becoming national in scope, yet for mobile administrators retirement benefit systems with 5- to 10-year vesting systems can have a devastating effect on retirement savings.

The impediments to mobility—for both teachers and administrators—may be particularly problematic for charter schools. Many charter schools are part of organizations (e.g., Knowledge Is Power Program [KIPP], Edison Learning, Imagine Schools) that operate in more than one state. Edison Learning, for example, operates schools in 16 states. As these schools attempt to replicate their school models, it is valuable to them to move staff from one location to another, particularly when they start new schools, in much the same way business firms relocate managers. As we have shown, current educator retirement benefit systems make such mobility very costly in those states where charter school employees are required to participate in the state’s teacher pension plan.

Such a system of rewards and penalties is hard to justify. To appreciate the importance of mobility, consider the large differences in the growth of public school enrollment between states. The National Center for Education Statistics projects that states such as Nevada and Arizona will see enrollment growth in excess of 40 percent between 2005 and 2017. Louisiana, Vermont, and Rhode Island can expect enrollment declines of 10 percent or more over this same period. Heavily populated states such as Michigan and New York can anticipate declines of between 5 and 6 percent. In a well-functioning labor market, one would see considerable movement of workers from areas of contracting demand to areas in which demand is increasing. In the case of teaching, however, the pension systems impose large costs on those who move.

The barriers to reform are primarily political. First, states have a coordination problem. It is in no state’s individual interest to facilitate mobility out of the state; to the contrary, states are inclined to keep average pension costs down by skimping on benefits for those who depart. In addition, the distribution of benefits within states between short-term and career teachers will be governed by the relative influence of junior versus senior educators in educator groups and state politics. Influence generally increases with seniority for a variety of reasons, and these are enhanced in the case of pension politics, because the benefits of pensions are far more immediate and tangible for senior educators than for junior ones. The opaque nature of final-average-salary DB systems, with their complicated eligibility rules, only reinforces this imbalance.

All that said, these barriers are not insurmountable. Similar issues arise in higher education, and yet the benefits of academic mobility have led many state and private universities to offer more portable retirement plans. As states grapple with the pension difficulties they now face, they should consider systems with smooth wealth accrual, such as the CB plan described in this article. Another alternative to consider might be a hybrid such as TIAA-CREF, which has features of both CB and defined-contribution plans and has proven popular in higher education. Such systems are more transparent, tie benefits more closely to contributions, and do not penalize mobility or job shopping among young teachers. At a minimum, education policymakers should consider experiments that provide actuarially fair alternatives to traditional DB plans for new teaching recruits, and evaluate their utility for recruiting and retaining high-quality teachers.

Robert M. Costrell is professor of education reform and economics at the University of Arkansas. Michael Podgursky is professor of economics at the University of Missouri–Columbia.

A recent “Policy Memorandum” from the Economic Policy Institute (“Making Mountains Out of Molehills:  Do Teacher Pensions Create ‘Peculiar Incentives’ for Retirement?”) by EPI researcher Monique Morrissey is sharply critical of our article “Peaks, Cliffs, and Valleys:  The Peculiar Incentives of Teacher Pensions,” published this year in Education Finance and Policy (EFP), and published last year for general audiences in Education Next.

In our original Ed Next article, we observed:

Teachers typically earn relatively little in the way of pension benefits until they reach their early fifties, when much larger benefits start to accrue. The system therefore pulls teachers to “put in their time” until then, whether or not they are well suited to the profession. Beyond that point, the pension system quickly begins to punish teachers for staying on the job too long, pushing them out the door at a relatively young age, often in their mid-fifties, even if they are still effective teachers. These “pull-push” incentives are embedded in the patterns of pension wealth accumulation over teachers’ careers, patterns that feature dramatic peaks, cliffs, and valleys that can greatly distort work decisions for no compelling public-policy purpose.

Morrissey has a number of critiques of our articles, but the main one, as the title suggests, is that our metaphors are inappropriate, and there is nothing at all “peculiar” about the structure of retirement incentives in teacher pensions.

Morrissey argues that the change in pension wealth is not characterized by peaks and valleys, and to make this point she refers to a graph that appeared in our articles. Unfortunately, Morrissey picks the wrong graph on which to base her critique – and misidentifies it.  Morrissey reproduces from our EFP article Figure 1 (for Ohio) below and claims that this graph shows the change in pension wealth as a percent of earnings over a teacher’s career.  In fact, this graph presents the level of pension wealth at any point in a representative teacher’s career as a percent of cumulative earnings up to that year.   This graph is of interest in its own right (see our paper), but it does not represent the annual change of pension wealth (known as the accrual rate).

The annual change of net pension wealth is the focus of our article, because that is what best conveys the pension system’s embedded incentives to work or retire.   It is a measure of annual deferred income from the system, the equivalent of an employer’s annual contribution to an employee’s 401(k) account.   But it is represented by another graph — omitted by Morrissey — one that is clearly characterized by peaks and valleys.  Indeed, Education Next featured this graph, superimposed on a mountain range to make the point.

Just to set the record straight, in Figure 2 we present the correct graph for Ohio — reproduced from our EFP article  – and let the reader decide if “mountain” or “molehill” is an apt metaphor, and whether “peculiar” is an appropriate adjective for the incentives represented by this graph.

In Figure 2 we report the annual accrual or change in pension wealth as a percent of annual earnings for a female Ohio teacher who enters at the age of 25 and works continuously.    As is clear in the graph, in her early years on the job, but after vesting, this teacher’s net pension wealth  grows at a very modest rate, beginning at zero percent in her first year after vesting (after netting out employee contributions1) and gently rising to 23 percent  of her annual salary during her 24th year of work (age 49).  However, year 25 is special.  In that year her pension wealth will jump by 164 percent of her earnings!  For example, if she earned a salary of $60,000 in that year, her net pension wealth would increase by $98,400.   Thus, her total compensation – current and deferred – for that year of work would be $158,400.  Not a bad year.

But other special years are in the offing.  A similar jump (143 percent) will occur in her 30^th year.  If she sticks around to age 60, another peak of 132 percent will occur.   After that time she will lose pension wealth by continuing to work.  If she works her 36^th year, her pension wealth will fall by 34 percent of her salary that year, and the losses will continue to grow with each passing year.  (Note that the pension wealth accrual that we plot is in addition to the teacher’s salary.   When pension wealth accrual turns negative, this is like a tax on earnings.)

Figure 2 contrasts with the relatively smooth accrual that would occur with a cash balance pension plan (see our EFP paper for an explanation of this type of program, used by many large private employers and a few public employers).  The accrual rate would be a relatively stable fraction of salary in any year — a flat line in diagrams like Figure 2.   By contrast, in teacher pension plans, the accrual of pension wealth is highly erratic and backloaded, with huge “peaks” in certain years, followed by “cliffs” and “valleys.”

In the article we noted that teachers tend to stay on the job in order to reach these peaks, and that teachers tend to be pushed into retirement by the imminent approach of the valleys.   Data from several states, as well as econometric studies, show that teachers are typically responsive to these incentives in timing retirement, which is consistent with  a large body of previous research showing that employees in other sectors of the economy also respond to pension incentives.    (For details, see “Teacher Retirement Systems:  Research Findings,” National Center on Performance Incentives, Research Brief (July).)  The incentives are typically much stronger for teachers (higher peaks & deeper valleys), so it would be surprising indeed if they were indifferent to the huge implications — hundreds of thousands of dollars — of their retirement timing decisions.

We will not reproduce all the graphs in our EFP or Education Next articles.  However, in defense of our use of the term “peculiar,” we reproduce one more chart for Ohio.   In Figure 3 we consider the annual accrual rate of pension wealth (as a percent of salary) for three otherwise identical female teachers.   One enters teaching at age 22, another at 25 (same as Figure 2), and another at 30.  We invite the reader to consider the widely different patterns of pension wealth accrual for these three teachers.   Note that the teacher who enters at age 22 has a truly special year, in her 30^th year on the job at age 52.   In that year, her pension wealth jumps by 383 percent of her earnings.

In the article, we plotted charts similar to Figure 2 for five other states in addition to Ohio.    These six states account for roughly 29 percent of employment of public school teachers.  Readers are welcome to examine the wealth accrual charts for these states.   Some have fewer peaks than Ohio, but some of them have peaks that are quite a bit larger, with single-year accrual rates of 200%, 400% or more.  A teacher can earn such multiples of her salary in pension wealth accrual during a peak year in her early or mid-fifties, and then start losing pension wealth if she continues to work for the rest of her fifties.  It is as if an employer promised to put $100,000 or $200,000 in your 401(k) when you turn 55, but then started to withdraw funds from your account thereafter.

“Mountains” or “molehills?”   “Peculiar?”   We’ll let the reader judge whether our descriptions exaggerate reality.   However, we do ask that EPI at least get the chart right.

[1] Morrissey states that Figure 1 is “misleading” because it compares gross pension wealth with the sum of employer and employee contributions.   However, Figure 2 and each of the paper’s 5 other similar diagrams identify the accrual as “net of employee contributions.”

This gap continues to widen.   We reproduce below an updated time series including the most recent quarterly data (June 2009), which was just released last week.  The vertical dotted line shows the end point of the time series reported in our article.   In March 2004, pension costs were 1.9 percentage points higher for teachers than for private sector managers and professionals.  By September  2008 this gap had more than doubled to 4.2 points, as reported in the article.   By June 2009, the gap had grown further still, to 4.9 percentage points.    As is readily seen in the graph, the reason for the widening of the gap is increasing pension costs for public school teachers.  Retirement benefit costs for private sector managers and professionals have been relatively flat.

As we noted in our article, as large as this gap is, it understates the gap in total retirement benefit costs because BLS does not collect data on retiree health insurance.   While most teachers have access to some sort of subsidized retiree health insurance, this benefit has all but disappeared in private sector firms.

The massive unfunded liabilities of teacher pension funds  virtually guarantee that these costs will continue to increase for public schools.   In addition, some states are also increasing employee contributions to shore up these funds.  An important  question for school administrators (and taxpayers) is whether these  traditional defined benefit pension systems are the best way to recruit, retain, and motivate a high quality teaching workforce.

Ms. Brooks has the opposite dilemma. She’s been teaching in Arkansas since age 25, and at age 53, in light of her exemplary career and continuing enthusiasm, she’s just been chosen to be a mentor teacher. The problem is her pension. Every year of additional service reduces her pension wealth, despite the fact that she and her district continue to contribute 20 percent of her pay into the fund.

Welcome to the world of teacher pensions.

Pensions have long been an important part of compensation for teachers in public schools. However, the incentive structures of teacher pension systems are not widely understood, even though they can have powerful effects on the composition of our teaching force and on public finance.

In our research, we have found that teacher pension systems have two strong incentives—a pull and a push. Teachers typically earn relatively little in the way of pension benefits until they reach their early fifties, when much larger benefits start to accrue. The system therefore pulls teachers to “put in their time” until then, whether or not they are well suited to the profession. Beyond that point, the pension system quickly begins to punish teachers for staying on the job too long, pushing them out the door at a relatively young age, often in their mid-fifties, even if they are still effective teachers. These “pull-push” incentives are embedded in the patterns of pension wealth accumulation over teachers’ careers, patterns that feature dramatic peaks, cliffs, and valleys that can greatly distort work decisions for no compelling public-policy purpose.

Teacher pension systems can also have important implications for recruitment. Pension benefits may seem distant and uncertain for prospective young teachers, who often change jobs. The costs, however, are incurred from the start in contributions from employer and employee that can exceed 20 percent of the teacher’s pay. Many young teachers, who are paying off student loans, starting families, and buying homes, might prefer more of their compensation paid up front rather than diverted into a system from which they may well never benefit.

Finally, the teacher retirement benefit system has major effects on K–12 school finance. Teachers who retire in their mid-fifties are likely to draw pension benefits for at least as many years as they taught. This can be expensive. A teacher retiring at age 55 with a $50,000 inflation-indexed annual pension has received an annuity valued at over $1 million. Retiree health insurance can add much more to the bill. To fund these benefits requires large contributions from employees and employers. In Ohio, for example, contributions currently stand at 24 percent of salary (10 percent from the teacher and 14 percent from the district). But even this falls well short of what is needed and pension officials are recommending an increase to 29 percent, to shore up funding for pensions and retiree health benefits.

There is a surprising disconnect between discussions of state teacher pension systems and the larger discussion of retiree benefits in an era of longer life spans and the impending bulge of baby-boom retirees. The retirement age for Social Security is being raised, but there is little discussion of the incentives to retire early from teaching. Just as the benefit overhang of GM, Chrysler, and Ford finally forced changes in their plans, the growing share of K–12 spending consumed by these retirement benefit systems may force similar changes.

As teacher retiree benefit costs spiral upward, it is important to begin asking what effect these systems have on recruitment and retention. In this article, we analyze the incentives embedded in teacher pension systems by examining the pattern of pension wealth accumulation over a teacher’s career.

PENSION PLAN BASICS

Public school teachers are almost universally covered by traditional defined benefit (DB) pension systems. The employer has an obligation to provide a regular retirement check to employees upon their retirement, based on a legislatively determined formula (see sidebar). The key characteristic of DB systems is that the benefit is not tied to the contributions that individual teachers and employers make to the pension fund. That is what distinguishes DB from defined contribution (DC) plans, known more popularly as 401(k)-type systems.

DB plans were once the norm in both the public and private sectors. In recent decades, private sector employers have shifted in large numbers to DC systems (or closely related systems known as cash balance, discussed below). In DC systems, the employer contributes annually to a retirement account for an employee, and the employee contributes as well. For example, a common arrangement in the private sector is for the employer to match employee contributions up to a certain percentage of the employee’s salary. If the employee quits, he takes the retirement funds with him. The employer is under no obligation to provide a given payment to the employee at the time of retirement. The employee, however, can always choose at retirement to convert the accumulated funds into a stream of payments for life by buying an annuity.

Conversely, when a teacher retires under a DB plan, she is entitled to a stream of payments that has a lump-sum value (or present value) that can be readily determined using standard actuarial methods. In principle, this pension wealth represents the market value of the associated annuity: it is the size of the 401(k) that would be required to generate the same stream of payments.

Typically, a DB teacher pension plan requires that both teachers and employers make a contribution each year to a pension trust fund, much as in DC plans, but the funding characteristics are very different. Under DC plans, the pension benefits are always fully funded, since the benefit is generated directly by the contributions. Under DB plans, individual benefits are not tied to contributions, so the pension fund as a whole is supposed to accumulate enough money to pay for the accrued liabilities. But this is rarely the case. Many teacher pension systems have large unfunded liabilities (e.g., California $19.6 billion, Missouri $5.2b, Ohio $19.4b, Oklahoma $7.7b, New Jersey $10.0b, all in 2006). Matters are made worse by legislatures that juice up the benefit formula when the stock market is up and the value of pension funds is high, only to find the systems saddled with even larger unfunded liabilities when the market turns sour. And as large as these liabilities are, they do not include future costs for retiree health insurance, an issue that is now beginning to appear on education-finance radar screens.

INCENTIVES TO TEACH OR RETIRE

The decision to teach or to retire at any given age can have profound financial consequences for the individual teacher. Small, and arbitrary, differences in the timing of retirement can be worth hundreds of thousands of dollars. Teachers cannot afford to be indifferent to these consequences, and many of them surely respond to the incentives embedded in the system. To appreciate these incentives, it is necessary to understand the pattern of a teacher’s pension wealth accumulation over the course of her career.

Figure 1 depicts the pension wealth, in inflation-adjusted dollars, at various ages of separation for a 25-year-old entrant to the Ohio teaching force, the profile of our hypothetical Ms. Baker. Clearly, the accumulation of pension wealth is not smooth and steady, but rises with fits and starts after age 50, due to rules of eligibility for early retirement and the like. During her first 24 years in the classroom, she accumulates $315,000 in pension wealth. However, over the next six years she accumulates more than $100,000 per year and crosses the million-dollar mark at age 56. Pension wealth reaches a peak by her early sixties and then starts to decline.

In this system, those teachers who retire after 25 years or more (age 50 in our example) receive more in benefits than has been contributed to the system on their behalf, while those who leave teaching earlier do not. The inequities here can be quite substantial. If Ms. Baker retires at age 56, her million dollars of pension wealth exceeds the cumulative contributions (with interest) of herself and of her employer by over $370,000; if she leaves at age 49, she will receive benefits worth $100,000 less than the contributions.

The next set of figures answers the question that is critical for understanding the system’s incentives: how much does a teacher’s pension wealth change if she works an additional year? This is a measure of deferred income received from employment. If, for example, a year of work raises a teacher’s pension wealth by $50,000 (net of interest on the prior year’s pension wealth), it is as if she had a 401(k) account that received $50,000 in contributions that year. Figures 2a through 2e illustrate graphically the peaks, cliffs, and valleys in pension wealth accrual from each additional year of work over the course of a teacher’s career in five state systems.

Consider Ohio, depicted in Figure 2a (which is derived from Figure 1). A teacher who enters service at age 25 (such as Ms. Baker) accrues pension wealth during her early years on the job starting at roughly 10 percent of annual earnings and gradually rising to 34 percent in her 24th year (age 49). Her 25th year of experience yields quite a bonanza: her pension wealth jumps by about 176 percent of her annual earnings. Each of the next five years also yields deferred income that equals or exceeds her current income. Pension wealth accrual drops off dramatically over the years following, with another sharp spike at age 60 (35 years’ experience). Beyond age 60, while both she and her employer are continuing to make large contributions to the retirement fund, Ms. Baker’s pension wealth actually shrinks, and at an accelerating rate.

All five states display sharp pension spikes. In Arkansas, a particularly sharp spike occurs at age 50 (see Figure 2b). In that year, a teacher’s pension wealth increases by almost five times her salary. For a teacher with a $50,000 salary, it is as if she received a $250,000 contribution to her 401(k) account. Her pension wealth accrual drops off precipitously the next year, and turns negative by age 54, creating the dilemma of our would-be mentor teacher Ms. Brooks. Similarly, teachers in Missouri, California, and Massachusetts experience pension spikes in their early to mid-fifties, followed by much slower growth and ultimately shrinking pension wealth at various ages (see Figures 2c–2e).

The dotted lines on Figures 2d and 2e indicate the pattern of accrual prior to benefit enhancements enacted by the legislatures in California and Massachusetts. These legislated changes created spikes where none existed. In Arkansas, benefit enhancements over the years have shifted the spike to the left, to earlier retirement. Ohio’s multiple-spiked system also reflects its history of benefit enhancements; it used to have a single spike at age 60.

WHAT CAUSES PENSION PEAKS, CLIFFS, AND VALLEYS?

What features of the benefit formula give rise to such sharp spikes in pension wealth accrual? One might expect that the growth in pension wealth would be fairly steady, as it is in a DC plan. After all, both the teacher and employer are making the same contributions year after year. But in a DB plan, pension wealth is not tied to contributions. The primary drivers of pension wealth accrual are changes in the annual annuity payment (determined by the benefit formula) and the number of years the teacher can expect to collect. It is the latter that is often the wild card in these systems.

Spikes in several of these states occur because teachers can start collecting their pension at an earlier age once they have worked a certain number of years. For example, during the first 24 years of teaching (to age 49), Ohio’s Ms. Baker had to wait until age 60 to collect her pension. However, her 25th year of teaching (at age 50) allows her to begin collecting pension checks five years earlier, producing a sharp spike in wealth accrual.

Another example is Missouri’s “rule of eighty,” under which a teacher is eligible to receive a full pension once the sum of age and service equals eighty, rather than the normal retirement age of 60. When our 25-year-old entrant passes age 45, each successive year of service allows her to start receiving her pension one year earlier, resulting in rapid growth in pension wealth for several years (see Figure 2c).

Once a teacher gets past the spike (or spikes), pension wealth accrual turns negative. This is not because her monthly pension check shrinks. In fact, it is growing. Rather, pension wealth falls because once she is at an age to begin collecting without deferral, each year of work requires her to forgo a year of pension, which is never recouped. The monthly payment is not enhanced sufficiently to offset this loss.

At this point in her career, the pension system serves as a twofold tax on earnings, first by the required employee contribution and second by the negative deferred income. Together, these can easily offset much or even all of her salary, in which case her total compensation is little or nothing. If the reduction in pension wealth from working an additional year exceeds the teacher’s take-home pay, her total compensation is negative and she is paying for the privilege of teaching.

DO TEACHERS RESPOND TO PENSION INCENTIVES?

The peaks and valleys of pension wealth accrual create large pull-push incentives. Teachers are pulled to stay on the job until they reap the benefit of the spikes: a few more years of “putting in time” can mean a difference of several hundred thousand dollars. Once a teacher is beyond the spike and pension wealth starts shrinking, the system is effectively pushing her into retirement.

There is ample evidence that such incentives affect behavior. Anecdotal evidence is commonplace of teachers (and others) timing their retirement decisions to the parameters of the benefit formula; pension systems routinely provide online pension calculators to help their members do so.  Labor economists have developed more systematic statistical evidence on the incentive effects of retirement benefit systems, particularly those in the Social Security system.  There has been much less research specifically on teacher pensions, but that which is available indicates strong incentive effects. In Missouri, for example, teacher labor-force data show that retirement rates spike when the sum of age and experience is around 80—consistent with the incentives embedded in that state’s “rule of eighty” eligibility formula.

UNINTENDED CONSEQUENCES: EMPLOYMENT AFTER “RETIREMENT”

Teacher pension systems typically have strong incentives for early retirement built in. Given concerns about teacher shortages and pressures from the No Child Left Behind Act to staff classrooms with qualified teachers, it makes little sense for districts to nudge experienced, credentialed, and effective teachers out the door at such early ages. Not surprisingly, all of these teacher pension systems have provisions that allow educators to continue to teach and collect their pension in certain circumstances (a practice called “double dipping”). These provisions seem to be expanding. Here are examples.

1. Part-time employment. All of the pension systems considered here allow retired teachers who are receiving pension payments to continue to work in covered employment on a part-time basis (without accruing additional benefits).

2. Employment in shortage areas. Many states permit retired educators to teach full time for a specified period of time in “shortage” fields.

3. Break in employment. Some states allow teachers to return to full-time employment and collect their pension after a specified break in service. In California the required break is 12 months. In Ohio, a retired teacher can return to work the next day, but must wait two months before receiving pension benefits.

4. DROP plans. Many states have implemented Deferred Retirement Option Plans (DROPs). These permit teachers to continue working full time for a specified period of time (up to ten years in Arkansas), during which all or most of their pension check goes into what amounts to an individual retirement account.

Of course, retired educators can resume teaching by crossing a state line or a district boundary to work in a different pension system. For example, Missouri teachers in the state pension system can retire and work full time in the St. Louis or Kansas City systems, or they can cross the border and work in Kansas.

The result of all of these postretirement options is that the decision to “retire” (i.e., collect a retirement check) is not necessarily the same as a decision to quit teaching. Unfortunately, we are aware of no comprehensive national data on this topic. Limited data from a national survey conducted by the U.S. Department of Education suggest that at least 5 percent of the public school teaching workforce is also collecting a teacher pension. A longitudinal study of Missouri teachers found that 12 percent of teachers worked at least one year part time or full time following retirement.

Reemployment provisions such as these are not found in the private sector, where early retirement incentives are usually part of a downsizing effort. In teaching, by contrast, early retirement incentives have a completely different origin, namely legislatively enacted benefit enhancements, typically under heavy union lobbying. Reemployment provisions are often a delayed response to the unintended (if often predictable) problems created by these incentives. In other words, these provisions are ad hoc fixes to enhanced pension spikes.

Postretirement employment blurs the distinction between current and deferred compensation. At the very least, this calls into question the meaning of published data on teacher compensation. In addition, as reemployment becomes easier, the incentive to “retire” at or near a pension spike becomes more pronounced, as there is no downside if employment can continue. It might also be in the district’s interest, if the pension costs are borne by the state. One might expect, therefore, that “retirements” would become even further concentrated at the spikes.

MORE UNINTENDED CONSEQUENCES: HEALTH INSURANCE

Another consequence of early teacher retirement is a linked demand for retiree health insurance coverage. Since regular Medicare eligibility does not begin until age 65, teachers who retire in their fifties have a gap of many years in coverage. In light of this, many school districts and states have extended health insurance coverage to retirees. Unlike the teacher pension system, payments for retiree health insurance are typically pay-as-you-go (i.e., no employer fund is created to pay for these future liabilities). Under new government accounting rules (GASB 43 and 45), benefit plans and employers will need to begin providing annual estimates of these liabilities in their financial statements. First hints at the figures are staggering. Los Angeles Unified, which provides complete health insurance coverage for all retirees, has an estimated $5 billion unfunded liability. A recent report by the Cato Institute estimates that the unfunded liabilities of state and local governments under GASB 45 could total $1.5 trillion. These unfunded liabilities create pressures for higher contribution rates, local tax increases, and spending cuts in other areas.

OPTIONS FOR REFORM

The underlying problem with DB systems is their distortion of retirement incentives, stemming from the broken link between benefits and contributions. DC systems and cash balance (CB) plans restore that link. Many large corporations have switched to DC and CB plans over the last 20 years. Some public entities, including a few teacher pension systems (Ohio’s is one), have also started to offer DC or CB-type options in their plans.

CB plans are similar to DC plans in that both systems tie benefits closely to contributions. The main difference is that in a CB plan, the return is guaranteed by the employer (typically at a rate comparable to risk-free Treasury bonds), so the market risk is not borne by the employee. Often the debate over DB vs. DC plans focuses on the issue of risk, rather than the retirement incentives. Since our subject here is retirement incentives, we focus on CB plans, where the issue of market risk does not arise.

The neutrality of CB plans with regard to age of separation can be simply depicted. In the pension wealth accrual graphs, the lines would be horizontal at a percentage given by the sum of employee and employer contributions (see Figure 2a). The system does not drive teachers to stay to their mid-fifties and then leave. Pension wealth never declines: if a teacher wants to work another year, the account grows by the contributions, plus the investment return. This can then be converted to an annuity. If a teacher works another year, the starting annuity is increased in an actuarially fair manner, since there is one less year of retirement to cover.

Such a retirement-neutral plan leaves the employee much more latitude to decide when to retire or switch careers based on individual preferences (such as Ms. Baker). It also makes it easier for schools to retain effective teachers (such as Ms. Brooks), who might otherwise be driven by the pull-push incentives of pension spikes. This is preferable to the heavy-handed DB formulas, supplemented by makeshift DROP formulas or other reemployment provisions. Finally, it is fiscally more stable when benefits are tied closely to contributions. Unfunded liabilities do not arise so readily, and legislatures have less opportunity to enhance benefits by shifting costs to future generations of taxpayers and teachers.

PRINCIPLES FOR REFORM

The time is ripe to consider teacher pension reform, with an eye both to teacher quality and fiscal stability. A new or reworked retirement system should embody several key features:

Neutrality. Each additional year of work should increase pension wealth in a fairly uniform way. There should be no spikes or cliffs at any particular years of service. Longevity decisions by individuals and their employers should be based on personal priorities and education needs.

Transparency. The accrual of benefits should be simple and clear. There should be no opportunities for “gaming” the system.

Portability. The private sector has moved toward systems that do not penalize young professionals for changing jobs. Portability may also help attract to teaching an energetic, talented portion of the labor pool, as well as midcareer switchers, such as engineers and other technical workers, who could make valuable math and science teachers.

Sustainability. The pension system should be self-funding. Individual benefits should be tied to contributions made by and for the individual teacher.

DC and CB systems satisfy all these conditions far better than the traditional and outdated DB systems. To build and maintain a qualified teacher workforce in today’s labor market, states should fundamentally reform their retirement benefit systems.

Robert M. Costrell is professor of education reform and economics at the University of Arkansas. Michael Podgursky is professor of economics at University of Missouri–Columbia.

It is the number of years at college that counts, not whether the college was the best or the worst; it is the number of graduate courses taken, not their excellence or usefulness or (usually) their relevance. Finally, the pertinent factor is how long the teacher has taught, not how well. And the difficulties of recruiting or retaining particular teaching skills are completely irrelevant in such a schedule. For any given set of “professional qualifications” so defined, a teacher’s salary is uniquely determined by reference to the schedule.

Nearly four decades later, this remains an accurate description of how the vast majority of public school teachers are compensated. No matter which grades or subjects or students they teach, no matter how well or poorly they perform, teachers are paid according to their school district’s “single salary schedule,” a system of pay steps and ladders that ensures that teachers with the same years of experience and education level (say, a master’s degree) receive the same salary.

Illustration by John Weber.

By thoroughly standardizing teacher pay, the single salary schedule suffers from a major flaw: It deprives the managers of public schools of the authority to adjust an individual teacher’s pay to reflect both his performance and market realities. For instance, many schools have trouble recruiting teachers in fields that command high salaries outside of education, such as mathematics and the sciences. The rigidities of the single salary schedule prevent them from addressing this shortage in the obvious way—by raising pay in these specialties. The result: Public schools are often forced to hire unqualified candidates to teach math and science courses. Likewise, few school systems provide extra compensation to teachers who work with the most severely disadvantaged students. Without pay incentives to keep them in the toughest jobs, veteran teachers often use their seniority to transfer to the most attractive schools in the system, leaving the neediest children to be taught by the youngest and most inexperienced teachers.

Moreover, most public schools either have never tried or have given up on compensation schemes that reward teachers for performance, such as merit pay. The conventional wisdom holds that merit pay is simply not suited to teaching: It is too hard to judge individual contributions to output,too difficult to identify what teachers must do to improve. But these arguments ignore the widespread use of performance incentives in a variety of other occupations that also involve complex relationships between individual performance and organizational outcomes. More than 90 percent of large public and private sector organizations use such incentives. Even teachers recognize that it is unjust to pay highly effective instructors the same as mediocre ones. In a recent Public Agenda survey, 69 percent of new teachers said it was a good idea to “pay higher salaries to teachers who prove to be highly effective in improving academic performance.” The limitations of the single salary schedule have prompted policymakers to search for alternative ways of compensating teachers. The most widely heralded reform, and the one most likely to garner the support of teacher unions, is knowledge- and skills-based pay, a compensation scheme in which teachers qualify for higher salaries by demonstrating their mastery of various competencies.

Knowledge- and skills-based pay, however, is largely untested. Such reforms have not been widely implemented in private industry.Of 19,016 North American companies surveyed in 1996 about their compensation schemes, only 54 reported using competency pay practices. If the only alternative is to continue with the single salary schedule, introducing differentials based on demonstrated competencies will probably accomplish some good. But it falls considerably short of the more fundamental changes that a more open, competitive market for educational services would foster.

External Assessments

Knowledge- and skills-based pay plans rely mainly on external evaluators and assessments to judge whether an individual teacher has reached certain levels of competency. Teachers can earn higher salaries by demonstrating proficiency on various tests and tasks deemed important to good teaching. Such a structure could entirely replace the single salary schedule. But, in practice, it is more likely that knowledge- and skills-based pay would supplement traditional rewards for education and experience.

The professional benchmarks for this new approach to teacher compensation include content tests such as the Educational Testing Service’s (ETS) PRAXIS II and performance-based assessments such as the PRAXIS III test and the National Board for Professional Teaching Standards’ certification process, which purports to identify “master” teachers who have attained high levels of expertise in their fields. The National Board’s process has proved especially popular; many states and school districts offer teachers $5,000 to $10,000 bonuses for becoming “board certified.”These national benchmarks may be augmented with instruments developed at the state and local level to assess teachers’knowledge and ability.These assessments have a common feature: Teachers are evaluated not by their immediate supervisors but by outside parties (employees of the ETS, scorers for the National Board). This raises an obvious question: Can these outside parties learn as much about an individual teacher’s competency and work ethic as someone who works with and observes that teacher day after day?

The National Board’s certification process is the prototype for many of these external assessments. It relies heavily on teacher portfolios, which contain samples of student work together with the teacher’s commentary and lesson plans. The goal of the National Board’s process is to ascertain how well teachers diagnose and respond to students’ learning problems. But the National Board requires teachers to submit only one assignment by two students of their choosing. The teachers write their commentaries on the purpose and effectiveness of the lesson well after the fact. With all the benefits of hindsight, candidates for board certification can portray themselves as more perceptive and effective than they actually were. Teachers also submit two brief videotapes of their teaching, but the choice of lessons is left to them. Moreover, interpreting the tapes requires background information about the class and the purposes of the lesson—information that is supplied, once again, by the candidates. The fact that many applicants for board certification now receive coaching on how to prepare their portfolios raises additional questions about the authenticity of the material they submit. Yet the National Board’s evaluators have no data from independent sources with which to verify the accuracy of the statements in a teacher’s commentary.

Nevertheless, the Board often does manage to learn something about teaching performance from the portfolios. Despite having every opportunity to portray themselves favorably, some teachers still fail the Board’s assessment. Other candidates are so outstanding that they are unlikely to have faked their performance or benefited unduly from coaching. The problem is the great middle, where the difference between successful and unsuccessful candidates may have much to do with coaching and with access to successful portfolios that can serve as templates for one’s own. It is worth noting that passage rates for board candidates have risen steadily as the number of facilitators and support groups for board candidates has multiplied. More than half of candidates are now rated “accomplished,” up from roughly one-third in the first year.

The National Board’s certification process is susceptible to cheating and coaching mainly because it relies on only a momentary glimpse into a teacher’s skills and habits.It indicates (at best) only what teachers know how to do, not whether they actually put their knowledge into practice. This is of special concern in the evaluation of veteran teachers, who experience varying degrees of disillusionment and burnout. Whether these instructors know how to teach is only part of the story. Of equal importance is whether they summon the energy and will to apply that knowledge day after day.

Managers Who Manage

Compared to outside evaluators such as the National Board, a teacher’s supervisor (such as a principal or department head) has a wealth of information about teaching performance. The supervisor can visit the classroom at times of her choosing, rather than the teacher’s (unless unscheduled observations are prohibited by the teachers contract). The number and duration of these visits are not limited. Students’ standardized test scores and the opinions of parents and other teachers can also be taken into account. Local supervisors know their teachers personally. They see which teachers interact well with colleagues at faculty meetings, who remains in the building late to help students,who devotes time and energy to extracurricular activities,and so on. There is nothing the Board knows from a teacher’s portfolio that the building principal, the department head, or other immediate supervisors cannot learn. And there is much that good supervisors will know that the National Board cannot hope to find out.

It should be noted that not all schools rely on external evaluation to administer their knowledge- and skills-based pay plans. But to the extent that schools rely not on supervisor judgment but on “peer review,” many of the same concerns arise. Peer-review procedures too often let teachers know in advance when they will be observed. They also too often include a checklist of approved behaviors that the teachers know they are to exhibit, and a “successful” rating usually means they will not be evaluated again for years to come. When present, these procedures render the validity of the peer-review process suspect. In addition, as peer evaluators are not held accountable in any broader sense for school performance, their motivation is unclear: What is at stake for them in passing or failing a fellow teacher?

Why, then, rely on external assessments or internal peer review rather than evaluation by supervisors? The reply most often given is two-fold: 1) Local administrators often cannot or do not use the information available to them to form accurate assessments of performance; and 2) Even when supervisors know who the better teachers are, they lack the authority to adjust pay accordingly.

If nothing can be done to address these legitimate concerns, then the argument in favor of knowledge- and skills-based pay is fairly uncontroversial. Better to pay teachers for their knowledge and skills than to continue the traditional practices represented by the single salary schedule. But this leaves some crucial problems unaddressed. By focusing solely on teacher qualifications, knowledge- and skills-based pay fails to compensate teachers for working with the most disadvantaged students. Teachers accepting the hardest assignments in their systems will continue to be paid on the same basis as others. It also fails to let teacher pay respond to the overall supply and demand for teachers in different subject areas, such as math and science.

While some school districts have defined competencies to include knowledge of subjects in which qualified teachers are in short supply,advocates of pay for knowledge and skills more often stress that all teachers can aspire to the status of “master teacher” regardless of the subject they teach. Given widespread teacher resistance to salary differentiation, this is not likely to change as long as the support of teacher unions is required to implement such policies. The Public Agenda survey of new teachers found more than half opposed to salary reforms that would “pay more money to teachers in subjects like math and science, where there are severe shortages.” Similar views have been reported in other teacher surveys.

Knowledge- and skills-based pay represents a step in the right direction. More fundamental changes are necessary, but the fact is that a complete overhaul of teacher compensation is unlikely to happen without broader changes in the market for educational services. A comparison of compensation policies in public and private schools reveals how much more can be accomplished when schools operate in a competitive environment that requires them to respond to market conditions and when impediments to managerial flexibility are removed.

Teacher Compensation in Private Schools

Administrators of private schools function in an economic and political context that characterizes only a small minority of public schools. First, as a rule each private school sets its own wage scale. Second, private schools are subject to powerful competitive incentives, as their students can remove both themselves and their tuition dollars if they are unhappy with the services being provided. And third, most private school teachers are not represented in collective bargaining.

School-based wage setting. A typical public school teacher works in a wage-setting unit (i.e., the school district) that is more than 100 times larger than the wage-setting unit of a typical private school teacher (the school). As shown in Figure 1, school districts that enroll more than 10,000 students employ an average of 1,483 teachers each (and together employ 46 percent of all public school teachers). In other words, a large share of public school teachers are employed in wage-setting units with well over 1,000 teachers. The average private high school, by contrast, employs only 27 teachers. Private elementary schools are smaller still, averaging only 11 teachers. Interestingly, the new charter schools emerging within the public sector, with an average of 14 teachers each, more closely resemble the private sector than they do the traditional public sector.

The size of the wage-setting unit has important implications for personnel and compensation policy. First, salaries can adjust more readily to market realities. Consider, for example, the salaries paid to primary- and secondary-school teachers.In today’s market, schools need to pay more to secondary-school teachers than to those in the primary grades, where the supply of comparably qualified instructors is greater. No such difference is seen in public school districts, of course. In the private sector, most elementary and secondary teachers work in different wage-setting units. As a result, private elementary teachers earn 16 percent less on average than secondary-school teachers of comparable education and experience.

A similar phenomenon appears in special education. Private schools that specialize in teaching students with disabilities tend to be free-standing entities with the power to determine their own compensation policies. In the public sector, these schools usually lack such autonomy. The difference shows up in relative pay. The data in Figure 2, controlling for factors such as length of the school year and the location of the school, show that starting salaries in public schools devoted to the provision of special education are only 4 percent higher than elsewhere in public education. Private schools that specialize in special education pay their teachers 14 percent more.

Competitive incentives. Because private schools must attract tuition-paying families, they need to recruit and retain good teachers. Operating under these market pressures, private school administrators use performance incentives to a greater degree than do their public school counterparts. Although administrators have various notions of what counts as merit pay, survey data from the National Center for Education Statistics show that private, nonsectarian schools are at least twice as likely as public schools to use something they call “merit pay.” Many more teachers qualify for such bonuses than in public schools that use merit pay, and the impact on compensation is significantly greater. Although these surveys do not report the size of merit bonuses, statistical analysis of total compensation detects no discernible impact of merit pay on the salaries of public school teachers who claim they receive it. By contrast, merit-pay recipients in private schools earn, on average, approximately 10 percent more than nonrecipients. This private school differential, as shown in Figure 2, holds true after statistical adjustments have been made for the teachers’ education, years of experience, and the overall level of salaries at the school. Furthermore, inasmuch as these differentials are often built into the teacher’s base salary, the long-term impact on compensation can be quite substantial.

Private schools are also more likely to use differentiated pay to attract applicants in subject areas where the supply of skilled teachers is limited. Nearly a fifth of all private schools offer special incentives to recruit teachers of subjects like math and science, where qualified instructors are in short supply. This is nearly twice the rate of public schools. Figure 2 shows that the sharpest contrast lies in the size of the incentives. Private school teachers in such fields earn 8 percent more than teachers of comparable education and experience in other fields. In the public school systems that claim to use such incentives, statistical analysis again finds no significant impact on teacher pay.

Pay flexibility within the private sector is greater than these figures suggest. A third of all private schools do not even have a salary schedule. Among those that do, the traditional criteria—academic credentials and teaching experience—explain less of the variation in teacher compensation than in the public sector, suggesting strongly that other factors are influencing pay.

All of these responses to the market are easier in the private sector because administrators are seldom subject to the constraints imposed by a collective-bargaining process. Unions have traditionally been opposed to differentiated pay for teachers of different subjects and to any form of merit pay that relies on a supervisor’s subjective assessment of teacher performance or objective measures of student achievement (e.g., standardized tests). In the absence of union pressure, private schools pay more for teachers at the secondary level, for math, science, and special education teachers, and for teachers of superior performance.

The contrast between the public and private sectors should not be overdrawn. Personnel policies in private schools are heavily influenced by professional norms and expectations established in the much larger public sector. Nonetheless, private-school policies indicate the direction we might expect teacher compensation to take if constraints on school administrators were lifted and educational success and failure were met with real rewards and sanctions.

Not Interested

Advocates of knowledge- and skills-based pay are fond of saying that they are merely adopting policies that have already taken hold in private industry. This is not only a substantial exaggeration of trends in industry; it ignores the fact that the private schooling industry has shown little interest in external assessments of teachers’ knowledge and skills. For instance, National Board certificates have been awarded to 4,804 teachers, but only 48 of the awardees, less than 1 percent, work in private schools. (By comparison, more than 12 percent of the teaching force works in private schools.) Likewise, the trend in private industry has been not toward external assessments but toward increasingly comprehensive in-house reviews (known as 360-degree reviews) that draw on information from peers, subordinates, and customers as well as immediate supervisors.

Pay for knowledge and skills is promoted as a flexible alternative to the single salary schedule. Yet this kind of flexibility has little to do with enabling administrators to assemble the staffs needed to accomplish their goals. In the end, knowledge- and skills-based pay continues a policy of rewarding teachers for possessing certain credentials. These credentials will be more varied than in the past. But the essential feature of the single salary schedule—paying teachers with equivalent credentials equally—is retained. Unless these compensation policies recognize market realities and offer higher salaries in shortage fields like mathematics, science, and special education—a step that is unpopular among teachers—all instructors within the wage-setting unit will be eligible to earn these credentials. While some teachers will end up earning more than others (as they do now), there will be no teaching jobs that pay more than others.

The lack of interest in the new compensation within the private sector should give us pause. Interest in knowledge- and skills-based pay appears strong only when there are impediments to more far-reaching reform of teacher compensation, such as powerful employee unions and weak mechanisms to further consumers’interests. The proponents of knowledge- and skills-based pay would have us believe that meaningful compensation reform can be accomplished without changing educational accountability and exposing schools to competitive forces that could alter the balance of power between students and parents on the one hand and school employees on the other. Perhaps they should be applauded for their pragmatism. Yet their efforts should not distract from fundamental reforms aimed at the underlying causes of salary rigidity.

–Michael Podgursky is a professor of economics at the University of Missouri–Columbia. Dale Ballou is a professor of economics at the University of Massachusetts Amherst. Their jointly written Teacher Pay and Teacher Quality was published in 1996.

Each year, the two national teacher unions, the American Federation of Teachers (AFT) and the National Education Association (NEA), release their surveys of public school teacher salaries across the nation. And each year, they take advantage of this opportunity to bemoan the condition of teacher pay. On the April 2002 release of the NEA’s data, then-NEA president Bob Chase complained, “It’s hard to convince someone to stay in the classroom when the salary is so low.” Likewise, the AFT decried the fact that the “average teacher salary continues to fall well below the average wages of other white-collar occupations.” The average teacher, according to the AFT, earned $43,250 during the 2000-01 school year, compared with an average of $52,664 for mid-level accountants; $71,155 for computer system analysts; $74,920 for engineers; and $82,712 for attorneys.

Of course, the AFT has chosen the comparison groups to make its best case. Where, one wonders, are the comparisons with journalists, registered nurses, assistant district attorneys, FBI agents, military officers, and other not-so-highly compensated professionals and public-sector employees? Shouldn’t the average pay of a high-school English teacher be compared with that of writers and editors? One could make a case that the salaries of high-school physics or calculus teachers should bear some resemblance to those of computer system analysts, but does the AFT believe that the appropriate compensation benchmarks for 3rd-grade teachers are the salaries of engineers or attorneys?

Nevertheless, data from the NEA and AFT are highly influential. Indeed, the U.S. Department of Education collects few data of its own on this matter. For the most part it simply recycles these union data in publications like the Digest of Education Statistics 2001, a standard reference in which five of the six tables on teacher pay are based on union figures. On the whole, such data present a fairly accurate picture of teacher salaries at the national level and have some value for state-to-state comparisons. Yet they suffer from severe limitations when interest groups, policymakers, and pundits use them to make a point about how the nation values public school teachers.

Summers Off

One facet of teaching that the NEA and AFT, in their data and in their public pronouncements, routinely fail to account for is the shorter workday and work year. In public schools, the median number of school days is 180 per year. Add half-a-dozen or so workdays for parent conferences, professional development, and planning, and the annual work year for most teachers is still shorter than 190 days. By comparison, an accountant or lawyer with two weeks of paid vacation and ten holidays or personal days will work 240 days annually—nearly 30 percent more days per year than public school teachers.

The typical teacher also has a shorter on-site workday than most other professionals. On average, teachers report being in school for fewer than 38 hours per week. This number rises to 40 hours if largely voluntary after-school activities such as coaching or club sponsorship are included. In fact, language limiting the number of hours that teachers are required to be in school is common in their collective-bargaining agreements, particularly in urban school districts. In the just-expired New York City teachers’ contract, the contractual workday was just 6 hours and 20 minutes (including a 50-minute duty-free lunch). The new contract extends the workday by 20 minutes. In Chicago, the limit is 6 hours and 45 minutes, including a 45-minute duty-free lunch.

Of course, many teachers put in nights and weekends at home grading papers and planning for the next week. However, a job that permits relatively more work at home is typically more attractive (particularly to women with children) than one that requires a similar amount of work time on site. And many other professionals bring their work home as well.

The combination of a shorter workday and work year means that the annual hours on the job for teachers are much shorter than in comparable professions. Consider Figure 1, which shows hourly rates of pay computed by the Bureau of Labor Statistics for a variety of occupations. By these calculations, only engineers, architects, and surveyors in private practice and attorneys earn more than teachers on an hourly basis.

The shorter workdays and work year make teaching an attractive occupation to those who wish to balance work and family needs. The shorter hours are especially helpful to women who want both a rewarding career and children, which helps to explain why roughly 75 percent of teachers are women and the share is increasing. An additional plum is that the on-site teaching hours match the schedule of a teacher’s own school-age children. In short, when the kids are at home, so is mom (or dad).

Consider the “sick kid” challenge. In many professions it is very difficult to take unscheduled time off for a sick child or other family emergencies. In teaching, however, the “substitute teacher” solution is a routine part of school life. Indeed, in collective-bargaining negotiations, school administrators frequently complain of excessive absences among teachers. According to a recent U.S. Department of Education survey, during the 1999-2000 school year, 5.2 percent of teachers were absent on any given day on average. That translates into 9.4 days out of a 180-day school year. During the 2000-01 school year in New York City, the annual rate of absences reached 11.3 days per teacher. These rates are much higher than in other executive or professional employment. The Bureau of Labor Statistics reports that the absentee rate for managerial and professional employees is just 1.7 percent of annual hours.

Teaching is also family friendly in the sense that little or no out-of-town travel is required for successful job performance. Teachers may choose to attend out-of-town conferences, but such travel is unusual and not a condition of employment. Although I am not aware of any systematic data collected on this topic, out-of-town travel seems to be commonplace for many young professionals.

The expansion of opportunities for women during the past half-century is supposed to have lessened the attraction of teaching. And yes, the earnings of college-educated women in other fields have grown faster than the earnings of teachers in recent decades. However, the mix of nonteaching jobs that college-educated women hold has changed as well. In 1960, 58 percent of college-educated women not employed as teachers worked as secretaries or other clerical workers, and only 13 percent were “managers.” By 1990 the clerical share had fallen to 30 percent while the share of managers increased to 35 percent (as did the shares of lawyers, accountants, and doctors). This shift from clerical to managerial and professional employment resulted in an increase in nonteaching earnings, but it also meant longer workdays and work weeks, greater responsibility (and stress), and, probably, less flexibility compared with teaching.

The bottom line is that teaching remains a job that makes it easier for parents to reconcile a career and family. Consequently we would expect female teachers to have more children—which is exactly what we see: among college-educated women aged 40 and younger, the average teacher had 2.1 children, versus 1.7 for other occupations. Of course, some of this difference may simply reflect the fact that teaching attracts women who like children and who would have been predisposed to have more children anyway. However, the fact remains that teaching is a profession that makes it less costly for these women to act on their preferences.

Starting Salaries

The most reliable data on pay and benefits for nonteachers are collected by the Bureau of Labor Statistics. Its economists and statisticians have a well-deserved reputation for maintaining very high standards for accurate and objective data collection on wages, benefits, labor force, and other economic data. Yet the AFT also presents tables and charts on earnings for new college graduates that rely on data collected by a private organization, the National Association of Colleges and Employers (NACE). Several times a year, NACE solicits reports on salary offers (not earnings) to graduating students. The AFT compares data from these NACE reports with scheduled starting salaries for teachers. In releasing the 2002 report, the AFT made much of the fact that “for new teachers, the $28,986 average beginning salary lagged far behind starting salary offers in other fields for new college graduates.” By comparison, the AFT says, accounting graduates were offered an average starting salary of $40,779; sales/marketing majors, $40,033; computer-science majors, $49,749; and engineers, $50,033 (see Figure 2).

While these NACE data apparently have some value to placement officers on college campuses (who pay the hefty subscription fee), they almost certainly overestimate the earnings of nonteachers. First, these data represent salary offers to a very small sample of the total number of college graduates. The 2001-02 report, for example, was based on only 2,600 offers to students in fewer than 120 higher-education institutions. More important, this sample of offers is likely to result in a misleading estimate of the earnings of all college graduates, since only large businesses or employers are likely to send recruiting teams to campus. Most small colleges do not submit reports to NACE. At a large state flagship institution such as mine, the University of Missouri-Columbia, only the business and engineering schools report job offers to NACE. Moreover, for the Missouri business school, the number of graduates far exceeds the number of job offers reported by the placement office.

The AFT’s data on starting pay for teachers must also be treated with some caution. Not all states collect such data, in which case the AFT estimates teachers’ starting pay. In the most recent report, the AFT had to estimate the starting salary in 17 states. However, researchers have no way of judging the accuracy of the AFT’s estimates, because they failed to document their methods.

A much more accurate picture of the relative pay of recent college graduates can be gleaned from Bureau of Labor Statistics national survey data on annual earnings. I pooled three years (1999 through 2001) of March Current Population Survey data and computed full-time annual earnings for college graduates under 30 years of age whose highest degree is a bachelor’s or master’s degree. I made no adjustments for hours or weeks of work. Not surprisingly, nonteachers earn more than teachers (see Figure 2): on average, 32 percent more (nonteachers earned $36,996, versus $28,156 for teachers). However, the pool of nonteachers has many more very high earners than the pool of teachers, which pulls the average up. Thus a more representative indicator of the typical teacher and nonteacher is median earnings. In this case, the gap in earnings between nonteachers and teachers falls to just 10 percent ($32,000 versus $29,000). The latter gap is readily explained by the shorter workday and work year for teachers.

Fringe Benefits

Neither the AFT nor the NEA makes any adjustments for the fringe benefits associated with teaching in a public school, thus masking an important part of total compensation. Unfortunately, published data do not permit precise comparisons of fringe (nonsalary) benefits for teachers and other professionals. For example, the Bureau of Labor Statistics reports fringe benefits for other professions, which include paid vacations. But nearly all teachers are on nine- or ten-month contracts and thus do not receive paid vacations. In addition, due to idiosyncrasies in the federal Social Security law, in some states teachers are included in state pension plans as well as Social Security, while in others they are not. Published Bureau of Labor Statistics data on benefits for “teachers” employed by state and local governments also combine full-time postsecondary teachers with K-12 teachers. This makes the comparison more difficult, but since public K-12 teachers account for more than 80 percent of the combined total, the data still provide some insight into the comparative benefits of teachers.

Employers’ largest fringe benefit cost is retirement plans. Virtually all public school teachers are included in traditional defined-benefit plans in which teachers receive pension payments according to a defined schedule on retirement. These differ from defined-contribution plans, like the TIAA-CREF plans in most public and private colleges, in which the retirement benefits depend on investment earnings and saving rates and may vary from employee to employee. Public school teachers become eligible for pension benefits (or “vest”) in these plans after five to seven years of employment. The contributions to these systems made by school districts or states are substantial. And because of the high turnover rates of teachers in their early years, these defined benefit plans in practice transfer wealth from young to more senior teachers.

The result is a system that permits teachers to retire earlier than they would if they were covered by Social Security or a conventional pension plan. For example, in the Missouri teacher pension system, a teacher who began teaching at age 22 and served continuously could retire at age 55 with 84 percent of her annual salary. In addition, her pension payments would be adjusted for inflation on an annual basis. Regular cost-of-living adjustments are unusual in private-sector defined-benefit programs. This teacher could also take employment in a new job and still collect her full pension benefits as long as the new employer was not a Missouri public school district.

National data show a similar pattern. In the 1994-95 Schools and Staffing Surveys, both male and female teachers who retired by the next school year averaged 59 years of age at retirement. By comparison, new retirees collecting Social Security retirement benefits have average retirement ages of 63.7 (men) and 63.6 (women).

The second largest fringe benefit cost (as a percentage of payroll) is health insurance. Health insurance coverage for public school teachers is nearly universal (more than 99 percent). The Bureau of Labor Statistics reports that health insurance benefits amount to 7.1 percent of hourly compensation costs for teachers (including postsecondary), but only 5.1 percent for professionals in private business. These same data suggest that the benefits provided to teachers are attractive relative to the private sector. For example, for individual policies, only 20 percent of health insurance plans for professional or managerial employees in medium and large private-sector firms are fully paid by the employer. The comparable share for teachers is 51 percent. Only 10 percent of medium and large private firms pay the full premium for family policies, compared with 29 percent in public school systems.

Private-Sector Teachers

Understandably enough, in comparing the salaries of public school teachers with those of other professionals, the AFT does not make what may be the most relevant comparison: between public and private school teachers. Perhaps this is why the levels of pay in private schools play such a small role in discussions of compensation in public schools. In areas other than K-12 education, personnel managers routinely use pay and benefits in the private sector as a benchmark in setting government rates. This holds for professional jobs such as lawyers, accountants, and nurses. Indeed, one important function of the compensation data collected by the Bureau of Labor Statistics is to provide private-sector as well as state and local benchmark data for federal wage setting. Public higher-education administrators are well aware of the level and structure of compensation for faculty in private institutions.

But public school districts rarely consult private school data in making their compensation decisions, even though 12 percent of teachers are employed in private schools and the two sectors compete for teachers. Mobility between the two sectors is extensive: 36 percent of full-time private and 13 percent of full-time public school teachers report some teaching experience in the other sector.

There are, however, some legitimate objections to public-private comparisons. First, many private schools have a religious orientation and are staffed by teachers of the same religious denomination. To the extent that such schools are advancing a religious mission, their teachers may be willing to work for less out of a religious commitment. Second, private schools are generally more selective in admissions than public schools, and, on average, their students are from households with higher socioeconomic status. To the extent that this results in better-behaved and more academically motivated students, it makes for a more attractive teaching environment in private schools.

Figure 3 compares public and private teacher salaries in a manner that attempts to address these concerns. First, I included earnings data only for teachers in nonsectarian private schools. In addition, I excluded private schools that have a special emphasis (special education, Montessori, Waldorf) and focused on schools that most closely resemble traditional public schools in mission. I also controlled for teachers’ experience, gender, education level, region, and urban or rural status. As the graph shows, teacher pay in these private schools is consistently below that of public school teachers. Starting pay in private schools begins at 78 percent that of public schools, rises to 92 percent of public school pay by a teacher’s 12th year, and declines thereafter.

Even with the above adjustments, a critic might argue that private school teaching is not comparable with public school teaching since the socioeconomic status of private school students is higher. In order to make the public schools more comparable with private, I excluded more than 90 percent of the sample of public school teachers and retained only public school teachers in suburban schools with little poverty (fewer than 5 percent eligible for free and reduced-price lunch). With these new criteria in place, the results look quite different. Interestingly, the shape of the pay function remains the same, but simply shifts down. Private school teachers now start at salaries that are 76 percent of their public school counterparts. This increases to 87 percent by their 12th year and declines thereafter. These results suggest that compared with the private sector, public schools overreward high levels of experience. Why do they do this? In a recent study, Dale Ballou and I found that public school districts that are unionized and have a large share of high-seniority teachers are more likely to “backload” salary increases by adding additional steps to salary schedules or raising the rewards for seniority.

Benefits are lower in private schools as well. The median nonsectarian private school reports fringe costs (including Social Security) as 18 percent of payroll, while the comparable figure for public schools is 21.5 percent.

Salary Trends

Computing the change in mean teacher salaries from year to year can paint a misleading picture of the average teacher’s situation. The reason is that public school salaries are set by schedules laid out in the teachers’ contract. These pay schedules, which apply to all the teachers in a school district, base salaries on a teacher’s years of experience and number of hours of graduate credits or graduate degrees. (See Table 1 for a typical salary schedule, from the Chicago Public Schools.)

When school districts raise the pay of teachers, they typically increase all the cells of these schedules by a fixed percentage, say 2 percent. Thus, if the education and experience of the average teacher in the district did not change from one year to the next, then average teacher pay would increase by 2 percent as well. However, that does not mean a typical teacher experienced a 2 percent pay increase between the two years. In fact, most teachers (except those who have “topped out” on the schedule) will receive a pay increase that is larger than 2 percent.

For example, a new teacher with a bachelor’s degree hired in Chicago in the fall of 1999 earned $32,561. Between the fall of 1999 and the fall of 2002, the average starting pay for Chicago teachers rose a modest 6.1 percent. However, by the fall of 2002, that teacher hired in 1999 is now in her fourth year of teaching and her pay will have increased to $40, 071, or 23.1 percent in three years. If the 2003-04 salary schedule again rises by 2 percent, as it has over the past several years, then at the start of the 2003 school year her salary will have grown by 31.1 percent. If she earns a master’s by that time, as many teachers do, her pay will have increased by 38.6 percent in four years—an average annual growth rate of 8.5 percent.

Given the steep tilt of salary schedules, changes in the experience mix of the workforce can be an important factor affecting changes in average teacher pay from one year to the next. This experience-composition problem also arises in analyzing national trends in average teacher pay, since many school districts are hiring more inexperienced teachers in response to rising enrollments, falling class sizes, and the retirement of older, more highly compensated teachers. According to U.S. Department of Education data, the median number of years of full-time teaching experience for public school teachers fell from 14 during the 1994-95 school year to 12 in 1999-00. Such a decline in the seniority mix of teachers tends to artificially mask the growth of average teacher pay and to bias comparisons of growth in teacher pay with pay in other professions, where the workforce is typically aging. It also makes simple cross-section comparisons of average pay between school districts or states problematic. We cannot be sure whether average pay is 10 percent higher in state A than in state B because salary schedules are higher in A or the teachers are older.

Trends in teachers’ salaries will also understate trends in teachers’ compensation if the costs of fringe benefits are increasing faster than salaries. Health insurance is an obvious example. Bureau of Labor Statistics data show that insurance costs (primarily health) represent 5 percent of hourly compensation costs for private-sector professional specialty occupations and managers, whereas for teachers they represent 7 percent of compensation costs.

Between 1980 and 1998 private-sector wage and salary costs grew by 104 percent, whereas costs for health insurance grew by 337 percent (even after widely publicized efforts by private-sector employers to restrain costs by introducing copayments and joining HMOs). Unfortunately there are no comparable data on the rise in insurance costs for public school districts. However, even assuming that public school districts made equally strenuous efforts at cost containment and held their health insurance cost increases to 337 percent, to the extent that health insurance is a larger share of payroll costs for public schools than for other private-sector workers, the relative compensation of teachers has increased. In short, in comparing the earnings of teachers and nonteachers, one cannot examine only trends in salary and assume that fringe benefits have been constant.

As states and districts attempt to meet the “highly qualified” teacher requirements of the No Child Left Behind Act, it will become increasingly important to gather more complete and accurate data on the relative pay and benefits of teachers. These data should also be disaggregated to reflect the fact that teacher labor markets are local or regional, and not national in scope. Attention should also be paid to differences in the opportunities that teachers face in the world outside teaching: a high-school physics teacher’s potential earnings are not the same as an elementary-school teacher’s. Policy discussions in this area have relied almost exclusively on the salary data collected by the teacher unions. A valuable step forward would be for the National Center for Education Statistics, in collaboration with the Bureau of Labor Statistics, to expand data collection on the relative pay and benefits of public school teachers so that states and school districts can have objective, arms-length data on this important issue.

-Michael Podgursky is chairman of the department of economics at the University of Missouri-Columbia.

The Flickering Mind: The False Promise of Technology in the Classroom and How Learning Can Be Saved
By Todd Oppenheimer
Random House, 2003, $26.95; 512 pgs.

Reviewed by Brian Nelson

In 1997 Todd Oppenheimer published a widely read Atlantic Monthly article, "The Computer Delusion," that painted a provocative portrait of technology's failure to improve education thus far. The article outlined a long history of high expectations and underwhelming results and made Oppenheimer a well known if controversial figure in the field of education.

In The Flickering Mind, Oppenheimer amplifies his earlier theme by visiting schools around the country to get a firsthand glimpse of how technology is or is not working in schools. In general, Oppenheimer does not like what he sees. The Flickering Mind offers a grim image not only of educational technology but also of modern schooling altogether. Oppenheimer denounces a cast of anti-heroes who he claims, through duplicity or stupidity, are destroying education.

The lead villains in The Flickering Mind are the hardware and software companies that hawk their products to schools. Corporations such as Apple, IBM, and Microsoft are portrayed as "self-interested manipulators" out to swindle "naïve" administrators and "gullible" teachers by foisting worthless technology on them.

To Oppenheimer, the central crime perpetrated by these businesses seems to be the very fact that they are businesses; they charge something for their products. Oppenheimer frequently juxtaposes the marketing slogans—improved learning! students who love school!—against the costs of implementing and maintaining classroom technology. The implication is that because businesses have a financial interest in selling technology, their claims regarding the educational value of their products cannot be trusted. No doubt technology firms, primarily interested in earning a buck, can sometimes make overblown claims. Most, however, probably believe in their products and hope to make a positive difference.

Nevertheless, Oppenheimer does an excellent job of highlighting the futility of simply throwing money at a problem. In case after case, he finds that schools have spent huge sums on technology at the expense of more pressing needs. He ruefully recounts tales of gleaming computer labs in crumbling buildings, purchased with funds that could have gone to art, music, shop, and teachers' salaries.

Oppenheimer derides schools that blow the budget on late-model computers and software with no thought to maintaining them or training teachers in how to use them. Maintenance of the machines often falls on a few harried technology workers who scramble from school to school or even a single enthusiastic teacher who operates as the default school network administrator, software buyer, and curriculum designer. New computer labs sit idle because overworked teachers have neither the time nor the training needed to make use of them.

These implementation problems are secondary, however, to Oppenheimer's belief that technology actually has little role to play in schools. He argues that there are fundamental weaknesses in the curricula delivered through technology. At various points in the book, he dismisses technology-supported, project-based learning; collaborative group work; computer-based simulations; and Internet-based research. In the face of teachers' happy claims, he sees only noisy "chaos."

Oppenheimer's opinions may reveal more about his personal outlook on modern education than about the value of technology in schools. Though he objects to this characterization, he clearly yearns to return to the education system of an idealized yesteryear. In one technology-heavy school, the only class Oppenheimer enjoys has a teacher lecturing to orderly rows of silent students, heads bent down and taking notes. He lauds aspects of proj-ect-based learning, but maligns it when it involves the use of technology.

For example, Oppenheimer admires traditional textbook-based research projects and "leafing methodically through a solid book," but dismisses Internet-based research proj-ects as lacking intellectual content. Material on the worldwide web, he claims, is often difficult to find, low in quality, and not easily understood by students. Furthermore, Oppenheimer complains that few of the PowerPoint presentations students design in lieu of more traditional paper-based reports show any depth or creativity. Where computers have failed, Oppenheimer hopes homespun projects featuring (among other things) knitting, pinecones, and homemade crayons will save the day.

Oppenheimer's antipathy toward modern pedagogy is further reflected in the few uses of technology he finds effective. His vision for "how learning can be saved" boils down to using computers as supplemental tools in support of traditional, teacher-led classroom activities.

For example, he advocates a "one computer per classroom" approach, in which teachers carefully guide groups of students through software programs. While this approach has some benefits in keeping kids on task, Oppenheimer seems to support it primarily because it moves the teacher back to center stage and eliminates the inherent messiness of allowing students some measure of control over their own learning. Because he rejects the notion of a student-centered, collaborative pedagogy, Oppenheimer necessarily also rejects the use of technology to support such learning.

While Oppenheimer's complaints about the poor quality of most software and computer-supported curricula are on target, it is difficult to place the blame on technology. When describing computer-based projects that are inventive and motivating, Oppenheimer is quick to point out that similar projects could be done without computers. But when discussing poor curriculum, he links low quality directly to technology. He can't have it both ways. If good curriculum is good, with or without technology, the same must be true of bad curriculum.

Most day-to-day activities in regular classrooms are no more or less inspired than their technology-supported counterparts. The reality of public schooling in the United States is that it has always had to aim at the middle. In trying to help most students learn pretty well most of the time, outstanding curriculum is going to be the exception rather than the rule. The promise of educational technology, as yet unfilled, is that such exceptions can become the norm.

–Brian Nelson is a doctoral student and instructor in the Technology in Education program at the Harvard Graduate School of Education.

The headlines in those early years of No Child Left Behind (NCLB) were consistently alarming. “As Standards Rise, Too Few Teachers,” was the one the Christian Science Monitor story referred to above. “Federal Education Report Finds Shortage of Qualified Teachers,” noted a headline in the Washington Times the following year.

In the flurry of activity surrounding implementation of NCLB’s student proficiency mandates, the federal requirement to have a “highly qualified” teacher in every classroom by 2005 seemed more like an impossible goal. The concern predated NCLB, of course: “Clinton Addresses U.S. Teacher Shortage” was a headline from August 2000. But NCLB’s demand that all new teachers hold at least a baccalaureate degree or higher, be fully licensed, and have demonstrated subject-matter competence in the areas they teach surely heightened the anxiety. However, 2005 has come and gone and the highly qualified–teacher crisis never happened. Why not?

The shortest answer is that the dearth of qualified teachers is largely a myth. So is the related notion that raising teachers’ pay across the board would bring significantly more qualified numbers to the profession. In fact, the resources provided to most public schools are adequate to recruit and retain a competent teaching workforce. A much more productive line of inquiry is one that explores the costs of the inefficient, rigid structure of the teacher compensation system and the possible benefits of replacing it with a more market-based system.

In Search of a Qualified-Teacher Shortage

Are school districts really beset by a shortage of the qualified teachers needed to meet regulatory standards? Despite the headlines telling us of the teacher drought, there are at present no nationwide data that would help us answer this question. One reason for this is that licensing standards vary from state to state. The most commonly used national data file, the Schools and Staffing Survey, includes a survey in which roughly 42,000 public school teachers were asked about their education backgrounds and teaching credentials. In the most recent available survey (1999–2000), 90 percent of public school teachers reported that they have regular state certification in their primary teaching area.

Administrative data from states or school-district report cards tend to reinforce these findings, even in those states that are said to have the most significant problems. California certainly represents one of the most highly stressed public-school systems in the nation. The school-age population is growing rapidly. The state has major fiscal difficulties. Much of the stress is self-inflicted: recall that in 1996 voters on a statewide ballot passed a class-size reduction initiative that greatly exacerbated teacher shortages and led to an exodus of teachers from many urban classrooms as suburban jobs opened up. In spite of these travails, in school year 2003–04, 89.4 percent of California public school teachers held full teaching credentials in their teaching area. Another 5.3 percent were in supervised intern or pre-intern programs. Only 5.2 percent were teaching with substandard credentials (emergency or waiver).

Still, virtually no school district is in full compliance with licensing laws. Missouri, for instance, tracks the percentage of courses taught by teachers with inappropriate licenses. During the 2002–03 school year, only two Missouri K–12 school districts had no courses taught by an inappropriately licensed teacher. The state average for teachers without proper credentials was 9.5 percent per district. Worth noting is that the prevalence of such teachers seems to have little to do with per pupil district spending. In fact, the district data show that higher spending per student is associated with a decrease in the percentage of courses taught by licensed teachers (see Figure 1).

Why is noncompliance unrelated to spending? Presumably, districts with higher relative pay would have lower turnover and thus fewer vacancies. They would also have larger applicant pools and thus more qualified applicants per vacancy.

But consider teacher licensing laws in Missouri. Like most other states, Missouri issues a single license to practice medicine, law, dentistry, accounting, nursing, and veterinary medicine. However, in the area of K–12 education, its Department of Elementary and Secondary Education currently issues 260 different certificates and endorsements (171 vocational, 89 nonvocational). This is only part of the story. There are levels of certification (permanent or provisional) for all of these and a host of grandfathered codes. The result of all this is 781 valid certification codes in the master teacher-certification file. And there is nothing unique about Missouri.

Now combine this complex licensing system with the dynamics of the teacher labor market, and the result is less than complete compliance even under the best of conditions. At the district level, roughly 10–12 percent of teaching positions turn over each year. Many of the exits are temporary, for child rearing or other family matters, and roughly one-third of district-level turnover comprises interdistrict transfers of experienced teachers. Inevitably, many school administrators find themselves scrambling against short deadlines to fill classrooms with qualified teachers.

Even with qualified teachers available, some classrooms necessarily will be filled with teachers whose certification papers are not in order. Perhaps the teacher’s license has expired and new approval is pending. Or maybe the state regulators have simply misplaced the certification paperwork.

Given the byzantine complexity of state teacher-licensing laws, the natural dynamics of the teacher labor market, and bureaucratic delay in granting and transferring credentials, full compliance is nearly impossible. Teacher labor markets likely have a natural rate of noncompliance that is above zero for many of the same reasons that the national economy has a “natural rate of unemployment” that is above zero. For this reason, it is unrealistic to hold school districts to a standard that requires perfect compliance with state licensing and NCLB requirements.

Pay: Teachers Compared with Other Professionals

Interestingly enough, pay is not the main stumbling block to more, and more-qualified, teachers. Despite the conventional wisdom that teachers are underpaid relative to other professions (thereby depressing the quality of the pool of teachers that schools can recruit and retain), teachers are paid a salary that is comparable to that of other professionals.

I compared teacher and nonteacher pay for 2003 in the 15 largest metropolitan areas, accounting for roughly one-third of the U.S. population. We can safely assume that they represent roughly one-third of the public school teachers as well. For the comparison, I selected occupations for which college degrees (but generally not postgraduate degrees) are common or required and for which U.S. Department of Labor data are available for many of these metropolitan areas. I do not claim that these occupations represent the relevant nonteaching earnings for teachers in all fields, but they probably are relevant for some. More likely, these occupations represent the general wage structure in the local labor market. Most teachers take jobs near where they grew up or went to college. So it isn’t national earnings of, say, computer analysts that matter; it’s the earnings of computer analysts in the local labor market. The weekly salary calculations shown in Figure 2 are based on pay for weeks worked rather than weeks under contract. Measuring pay by weeks worked increases the weekly pay for nonteachers because they have more paid leave than teachers.

The analysis of these data shows that, in these 15 metropolitan areas, teachers have a very large premium in comparison with clinical lab technicians and social workers. Compared with librarians, teachers have virtual parity in annual earnings but a 20 percent premium in weekly earnings. Their annual pay is roughly 10 percent below computer programmers, but on a weekly basis is 20 percent above. Teachers’ annual pay is less favorable than that of architects, engineers, managers, and administrators, but weekly pay is very similar. In sum, these data suggest that on a weekly basis, teachers’ pay is quite competitive with that of many other professions.

Data from a survey of households by the Census Bureau’s March 2003 Current Population Survey reinforces the findings based on the Department of Labor data. The data from this survey enable us to look at teachers’ pay in both urban and rural areas. Since wages tend to be lower across the board in rural areas, one will overestimate the nationwide teacher versus nonteacher gaps unless one takes urban and rural pay differences into account. Once we do so, the annual pay of female teachers rises to 96 percent of that of other female college-educated workers. Thus, on a weekly basis, female teachers earn more on average than nonteachers.

Anecdotal data also suggest that, even setting aside the enormous benefit of the job security that accompanies tenure, the fringe benefits of public school teachers compare favorably with those in the private sector. According to recently released Department of Labor data, insurance (primarily health insurance) and retirement contributions are a substantially larger percentage of total compensation for teachers compared with professional employees in private-sector employment (see Figure 3). Most teachers are not covered by the federal Social Security system, so legally required contributions by their employers are somewhat smaller for teachers, but overall, benefits total 20.2 percent of payroll for teachers and 17.0 percent for private-sector managers and professionals.

Whether we look at salary or fringe benefits, there seems to be ample evidence that, when compared with other professions, teachers are paid adequately enough to attract qualified individuals to the job.

Better Teachers’ Pay Does Not Mean Better Student Outcomes

Even if our nation’s schools are not beset by a widespread shortage of qualified teachers and teachers are paid salaries comparable to other professionals, there are still those who believe that teachers’ pay is too low, that their salaries are simply not commensurate with our expectations of a good education for our children. This conviction, which we can call “social underinvestment,” views teachers’ qualifications as a continuum. We are underinvesting in teacher quality in the sense that a dollar increase in teachers’ pay would yield more than a dollar of benefit to society in the form of student achievement gains. However, research to date finds little evidence of a strong positive effect of teachers’ pay on student achievement.

One review finds that 14 of 17 studies that use student-level data and include measures of previous student achievement to assess the value that a teacher adds to student learning showed teachers’ pay to have no effect on student achievement. Two sophisticated studies of teachers’ effects conducted in 2005 cast further doubt on a positive wage effect. Brian Jacob and Lars Lefgren find no relationship between teachers’ pay and their performance in a mid-sized, western school district (see “When Principals Rate Teachers,” research, page 58); and Eric Hanushek, Steven Rivkin, and Daniel O’Brien, in a 2005 working paper published by the National Bureau of Economic Research, report no relationship between teacher productivity and changes in pay, suggesting that surrounding districts do not pull the most effective teachers from the city by offering higher salaries. Moreover, even in studies finding a positive effect, there is no evidence that across-the-board pay increases are a cost-efficient policy.

To supplement this research evidence, one can also learn from the private-school market for teachers. Suppose, for instance, that the benefits of higher teachers’ pay did, in fact, outweigh the costs, and that public schools were setting teachers’ pay inefficiently low. If that were the case, one would expect to see private schools, which operate in a very competitive market, paying teachers more. After all, private-school parents should be willing to pay higher tuition to support higher-quality teachers if it enhances their own children’s achievement. And many of these same parents will soon be paying college tuition rates, far in excess of those in K–12.

There are, of course, legitimate objections to public–private comparisons. First, many private schools have a religious orientation and are staffed by teachers of the same religious denomination. To the extent that such schools are advancing a religious mission, they and their teachers are not comparable to public K–12 schools. Second, private schools are generally more selective in admissions than public schools and, on average, have students with higher socio economic status. To the extent that this results in better-behaved and more academically motivated students in private-school classrooms, it makes for a more attractive teaching environment.

I attempted to compare public and private school teachers’ salaries in a way that would address these concerns. I analyzed earnings data only for private school teachers in nonreligious private schools. In addition, I excluded private schools that have a special emphasis (such as special education, Montessori, Waldorf) and focused on schools that most closely resemble traditional public schools in mission.

Even with these adjustments, the data suggest that private school teachers earn only 87 percent on average of what public school teachers earn. A critic of private–public comparisons might still argue that private school teaching is not comparable to public school teaching since the socioeconomic status of the former students is higher. In order to make public schools more comparable to private ones, therefore, I exclude more than 90 percent of the public school teacher sample and retain public school teachers only in low-poverty (less than 5 percent eligible for free or reduced-price lunch) suburban schools. In such cases, private school teachers earn even less, just 80 percent of what their public school counterparts earn. And not only are private school salaries lower, but the benefits are lower as well.

It is possible that teachers find the ability of private schools to exclude unruly students a form of “compensation,” but the fact that we observe selective private schools paying much lower teachers’ salaries suggests that whatever positive effects higher teachers’ pay could have on teachers’ quality, administrators must believe that the outlay would not produce commensurate benefits in student achievement, or at least benefits of sufficient magnitude that parents would be willing to pay for them.

The Bottom Line

In the end, the most reasonable standard for determining if teachers’ pay or quality is adequate is whether a district is meeting current regulatory standards. Some skeptics argue that qualified-teacher standards are not very high. And no doubt there is some merit in this charge. But what standards do we use?

However seriously we may wish to improve student achievement through higher teacher quality, the research to date does not provide observable buttons to push. In fact, the evidence linking any type of teacher training, licensing, or testing to student achievement is mixed at best. While measures of teachers’ general academic skills, such as SAT scores and college selectivity, are often statistically significant predictors of teachers’ effectiveness in raising student achievement, their effects are modest in size.

All of this virtually guarantees shortages, or recruitment difficulties, in some fields and schools at some time, even if the overall level of resources for pay and benefits in the district are more than adequate. For example, in 2004 there were 25 applicants for every elementary-school vacancy in Missouri, but just 5 for each chemistry opening. If a single-salary schedule for a school district yields a large surplus of qualified applicants for elementary education, social studies, and physical education, but no qualified applicants in physics or speech pathology, is teachers’ pay in this district adequate? By suppressing performance or field-based pay differentials, these schedules may be driving able teachers out of the profession. A district that insists it must raise the pay of all teachers in the district because it cannot recruit a certified speech pathologist is not spending money wisely.

Finally, state licensing standards must have some flexibility. As noted above, the large number of certifications and endorsements guarantees that virtually no district can assure that every class will be taught by a teacher with the right certificate and endorsement. Indeed, most of the “out of field” teaching in public schools would disappear overnight if states issued a single license in K–12 teaching as they do in medicine, law, accounting, and other professions. Short of that, aggressive development of “alternative route” licensing programs that target existing vacancies holds considerable promise. Teachers in some small rural schools cannot be licensed in every field in which their teaching skills are required. Here, too, licensing standards must have some flexibility.

In short, there may be a good case for raising the pay of some teachers—such as those in fields or schools that are difficult to staff or who are exceptionally effective in the classroom. However, there is little evidence that across-the-board increases in relative pay for all teachers are necessary to staff public schools with qualified teachers.

Michael Podgursky is professor of economics at the University of Missouri–Columbia.