In Missouri, a teacher who retires at age 55 receives a lifetime pension worth 33 percent of cumulative earnings, but only 1 percent if she leaves at 35. Yet in both cases her employer contributed 12.5 percent of earnings each year. Redistribution or not? These incentives do encourage teachers, effective or not, to stay until early retirement (but no longer), while likely discouraging entry of mobile young teachers with 10 to 15 years to offer. Peculiar incentives or rational? The huge penalties for cross-state mobility may be rational for each state, but not for the U.S. K–12 system. Do we recommend jettisoning DB pensions? No, we recommend cash balance systems, which are DB but offer far greater portability and reward all years of service equally: benefits are tied to contributions, so no redistribution occurs.

For more on this from Costrell and Podgursky, please see their blog post “Yes, We Have No Bananas” – http://educationnext.org/yes-we-have-no-bananas/

“Golden Handcuffs” (research, Winter 2010) draws attention to the important incentives that are built into many teacher pensions, but shortcomings in the authors’ analysis lead them to spurious conclusions.

First, despite the authors’ claim, legally and otherwise, pension plans cannot and do not redistribute wealth.

Second, the authors incorrectly assert that there is no justification for the incentives embedded in teacher pensions. To the contrary, one of the most pressing issues facing schools is keeping top talent, especially in hard-to-staff areas. In light of this, retention incentives (which the authors refer to as “mobility penalties”) make perfect sense.

Economic research stretching back more than two decades has documented the strong retention effects embedded in traditional defined-benefit (DB) plans, where benefits are based on an employee’s final pay. Authors Costrell and Podgursky describe the well-recognized pattern of benefit accruals in such plans and then jump to the conclusion that it serves no purpose. But, as economists have long known, it is precisely because of this pattern, which offers greater rewards for loyal employees who provide long service to an employer, that many employers offer DB pensions. Because turnover is costly (both in dollar terms and in terms of productivity), it makes sense for employers to build incentives into compensation that reward long service.

Indeed, until only recently, the vast majority of Fortune 500 companies relied heavily on DB pensions to retain top talent. Even as some private-sector employers have moved away from these plans in recent years, they have been careful to develop other compensation structures that mimic the incentives provided by DB pensions. Deferred compensation in the form of stock options or restricted stock awards is similar to pensions in that it encourages loyalty to an employer.

The problem is that school districts and government entities cannot offer stock options, restricted stock, or similar benefits. Thus, jettisoning DB pensions, as the authors recommend, can be expected to cause increased turnover and attrition of our most-effective teachers, hurting productivity and quality, in other words, exactly the wrong solution for our schools.

Beth Almeida
Executive Director
National Institute on Retirement Security