Public School Pension Plans Penalize Teachers who Move Jobs across States with Significant Retirement Losses, Researchers Find
Education Next News Release
For Immediate Release: November 12, 2009
Robert M. Costrell, University of Arkansas (479) 575-5332
Michael Podgursky, University of Missouri-Columbia, (573) 882-7741
STANFORD — A 30-year veteran public school teacher who moves and splits her employment between two state retirement systems is at risk for losing well over one-half of her pension wealth, according to new research from economists Robert M. Costrell of the University of Arkansas and Michael Podgursky of the University of Missouri-Columbia.
In examining pension plans in six states, Costrell and Podgursky find that compared to a neutral cash balance system, the type of defined benefit pension system which covers almost all public school teachers redistributes about half the pension wealth of an entering cohort of teachers to those who subsequently retire in their mid-50s from those who leave the system earlier. Costrell and Podgursky’s findings appear in the winter issue of Education Next and are available now at www.educationnext.org.
One of the main reasons for this inequality in benefits 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, collecting fewer payments over their retirement.
In the six states they studied, Costrell and Podgursky found that a hypothetical teacher who starts teaching at age 25 and spends 15 years in her first job before moving to another state and teaching for 15 more years, loses substantial amounts of net pension wealth. In Ohio, for example, the loss by age 55 of a teacher who moves when she is 40 would be more than $520,000 or 74 percent of her net pension wealth. In Missouri, the loss would be more than $400,000 or 65 percent.
Population shifts between states are expected to dramatically change public school enrollments in coming years. The federal government 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 expect enrollment declines of 10 percent or more over the same period. Heavily populated states such as Michigan and New York anticipate declines of between 5 and 6 percent. One would expect to see teachers moving from low-enrollment to high-enrollment states if the labor market is well-functioning. However, most state pension systems create severe disincentives that, in effect, handcuff teachers to a single state.
This holds true for public school administrators, as well, who are included in teacher retirement systems. Even as the market for administrators in urban school districts is increasingly becoming national in scope, they are forced to suffer similar pension penalties for moving. And these impediments may be even more problematic for charter school organizations that successfully operate schools in more than one state. When they replicate school models, it is often beneficial to be able to move staff from one location to another in much the same way business firms relocate managers. Current retirement benefit systems make such moves inordinately costly in states where charter school employees are required to participate in the state’s teacher pension plan.
As states grapple with escalating pension problems, Costrell and Podgursky recommend they consider systems with smoother wealth accrual, such as a cash balance plan that calculates employee retirement benefits based on cumulative contributions with a guaranteed rate of return, or a hybrid such as TIAA-CREF, which has features of both cash balance and defined-contribution plans. Hybrid plans have proven popular in higher education where the benefits of academic mobility have led many state and private universities to offer more portable retirement plans. Such systems are more transparent, tie benefits more closely to contributions, and do not penalize mobility or job shopping among young teachers.
Now online at Educationnext.org:
- Read Robert M. Costrell and Michael Podgursky’s article “Golden Handcuffs.”
- Watch “Teacher Pension Reform” — Education Next editor-in-chief Paul E. Peterson’s video interview with Robert Costrell.
- Listen to “Pension Reform Would Be Good for Teachers” — Robert M. Costrell and Michael Podgursky’s discussion about how to fix current teacher pension systems.
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.
Education Next is a scholarly journal published by the Hoover Institution that is committed to looking at hard facts about school reform. Other sponsoring institutions are the Harvard Program on Education Policy and Governance and the Thomas B. Fordham Foundation.
FOR FURTHER INFORMATION:
Caleb Offley (585) 319-4541
Hoover Institution, Stanford University
Stanford, CA 94305-6010