The Teacher Pension Cost Gap Continues to Widen



By 09/14/2009

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In the Spring 2009 issue of Education Next, Robert Costrell and I presented data on the growing gap between employer pension costs for public school teachers and employer pension costs for private sector managers and professionals.  The key chart in that article was a time-series showing pension costs (including Social Security) as a percent of salaries for the two groups.  These are computed from the National Compensation Survey, an employer survey  on wages and benefits conducted quarterly by the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor.    For reasons of sample size, the BLS only began releasing data on public school teachers in March, 2004.   The most recent data we reported in the article was from September 2008.  We showed that pension benefit costs are significantly larger for public school teachers than for private sector managers and professionals, and that the gap was widening.

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.

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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.




Comment on this article
  • Jay P. Greene says:

    Do these figures include all of the unfunded liabilities associated with teacher pensions or do they just capture what is currently being spent (excluding the unfunded portion of future benefits)?

  • tim-10-ber says:

    If the school district or governmental entity is unable to pay these pensions what happens? Do taxes go up in order to fund them? Also, have any districts gone to a defined contribution plan like the corporate world?

    Thanks!

  • George Mitchell says:

    As the post notes, comprehensive data on unfunded health care liabilities for teacher retirees are not readily available. In Milwaukee the amount is about $2.5 billion, or twice the district’s total annual budget. The collective impact of current and future pension and health care benefits is unsustainable. Wide-scale bankruptcy, legal or de facto, is certain. Media coverage of this is hard to find.

  • Bill Allen says:

    One of these days private sector workers are going to wake up and realize that they are funding defined benefit retirement plans for teachers and other public sector workers which they themselves do not have.They may also realize that claims that teachers are poorly paid is a myth propogated by teachers and their labor unions.Teachers are part time workers but always try to compare their pay with full time workers who work about 23% more hours in a year.The way to compare teacher pay is on an hourly basis and if you do you will find that they compare very favorably.

  • To Jay Greene: These are based on current costs to employers. Do these contributions take account of the sharp decline in stock prices over the last two years? For the most part they do not. The employer contributions for teachers include an additional payment intended to amortize or pay down the unfunded liabilities over a period of time (usually 30 years). However, the current contribution rates are based on fund performance in fiscal 2008 or 2009. In addition, the actuaries employ smoothing techniques so gains or losses are spread over 3-5 years. The bottom line is that the current contribution rates do not fully reflect the sharp decline in stock prices over the last two years. In the absence of a substantial recovery in the stock market, we can expect further increases in the teacher pension costs in coming years. (Note: a recovery must not only return us to where we were, but also incorporate the 8 or 8.5 percent annual return that is assumed by the pension funds, e.g., two years of zero returns puts a typical fund 17-18 percent in the hole.)

    To Tim-10-Ber:
    You raise an interesting scenario. Most pension plans are run by states, not districts. So if a district were to go into bankruptcy, liabilities to teachers and retirees would be covered by the fund (i.e., the other districts). However, no state has ever gone bankrupt, but as states face greater and greater fiscal stress, the question becomes: what can be cut? Amy Monahan, a University of Minnesota law professor, presented an interesting paper on the legal status of teacher pension fund promises at a conference on teacher retirement benefit systems at Vanderbilt University last spring (see link below). It’s a complicated question that I suspect will be tested in the courts in coming years.
    Your question: do taxes go up? Either taxes will go up or other school spending will be cut.
    The vast majority of public school teachers are covered by traditional defined benefit plans. There are very few exceptions. In Alaska all new teachers are in a DC plans. In Ohio, South Carolina, and Florida, new teachers can choose a DC plan. I’d encourage you to read the excellent overview paper by Janet Hansen (“Introduction to Teacher Retirement Benefits”) on the Vanderbilt web link below:
    http://www.performanceincentives.org/conference/papers2009.asp

    RE George Mitchell: George is correct. Retiree health insurance is an entirely different issue. Often these are negotiated by districts, but some states provide these benefits. Unlike pensions, retiree health benefits are usually not prefunded. The data on the unfunded liabilities of these HI plans is incomplete, but new GASB standards require districts to report estimates of these liabilities. There is a nice paper by Robert Clark on the Vanderbilt web site on this topic. As George points out, for some urban districts these unfunded liabilities are huge. A recent report for the Los Angeles school district estimated a $10 billion dollar unfunded liability for their retiree benefits.

  • Peter A. quilci says:

    Whether or not lucrative pension plans and other government employee retirement benefits are useful to recruit teachers is moot. These plans are unsustainable. The question is when, not if, local taxing bodies will declare bankruptcy under Chapter 9 or property taxpayers, who primarily support public teacher salaries and their pension benefits in most areas, will revolt and force cutbacks. Because government employee pensions and other benefits have been cagily protected in most state constitutions, there will be a court battle in each state pitting private sector against public sector workers. The preferable solution is for teachers and all local government employees to voluntarily relinquish these egregious and unfair bonanzas at least on a go forward basis. Pensions providing 70 to 85% of salary in some instances as early as 50 with full healthcare are benefits unsustainable in a US service economy, especially when no such benefits are even remotely available in the private sector. Can anyone argue against this pposition based on ethics and common sense?

  • Bull says:

    Quoting …”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.”

    NO …Wrong question and addressed to the Wrong group:

    The ADDRESSEE should be Private Sector TAXPAYERS (not “school administrators” that have very similar pension/benefits as teachers and LIKE the status quo).

    And the question for taxpayers is … when are we going to wake-up, and DEMAND an end to this RIPOFF !

  • Bull says:

    Quoting from Peter A. quilci’s comment:

    “The preferable solution is for teachers and all local government employees to voluntarily relinquish these egregious and unfair bonanzas at least on a go forward basis.”

    Excellent suggestion ….. as long as this change is NOT just applicable to NEW employees, but ALSO to all FUTURE YEARS OF SERVICE for CURRENT employees. Without this, we will save nothing for 20-30 years until these new employees retire…. and we’re broke NOW.

  • I’d encourage interested readers to check out the Pension Watch web site. This follows newspaper articles and blogs on the more general issue of fiscal sustainability, politics, and scandals in state and local pension funds nationally.

    http://www.pensiontsunami.com/

    The latest issue of the Fordham Institute Gadfly has good article on the crisis facing the Ohio teacher pension system:

    http://www.edexcellence.net/gadfly/index.cfm?issue=519&edition=O#a5482

  • Jamie Davies O'Leary says:

    What I find most interesting is your last question—and how people don’t always make the connection that monumental pension costs (and the overall structure of the teaching pay scale) inhibit the profession from recruiting the most talented teachers. It’s no surprise that fewer young people sign on to any profession – teaching or otherwise – for a lifetime. Non-portable pensions just don’t make sense.
    And the incentives could not be more perverse. As a teacher who left the classroom two years ago, it’s difficult to even articulate the level of frustration over knowing that my salary was half that of my colleagues—by virtue of the fact that they had more “steps” and a master’s degree they completed online. I think of the profession as a giant trap for risk-averse people, luring in the types of people who are not fundamentally risk-seeking (and I would theorize this correlates with entrepreneurialism, leadership, etc. and other qualities we NEED in schools). Then we wonder why the profession as a whole is stagnant and resistant to innovation and change.
    Other forces in today’s economy compound the problem for young people wishing to teach—namely outrageous student loan debt and cost of living/housing price inclines. In 07-08, nearly two-thirds of undergraduate students (4-year colleges) acquired student loan debt and the average was $23,186. And in many cities, teachers have to spend far more than the 30% housing cost burden mark. Even if the education establishment doesn’t want to restructure the pay scale to be fairer to younger teachers, more districts could acknowledge at least these two factors, and provide student loan repayment assistance or housing assistance in order to be more competitive in recruitment.

  • Eric Ulas says:

    The fact that state pension systems are on a slow, forced death march is obvious. I knew this my first few years of teaching. Contributions constantly rose while benefits were slowly trimmed away. I couldn’t help but wonder if the system would even exist in 35 years.
    With a generation of college graduates overcome by student loan debt and rising living costs, there is no doubt that low teacher salaries definitely steer people away from teaching. This is especially troubling for math and science education. Who wants to start at 30k as a math teacher when you can easily make 45-50k as a CPA?

    I can tell you that as a young teacher I would gladly have taken higher pay and managed my retirement options privately.

  • b martin says:

    To ‘Bull’ and Peter A. quilci -
    From your post (without sources)
    “The preferable solution is for teachers and all local government employees to voluntarily relinquish these egregious and unfair bonanzas at least on a go forward basis. Pensions providing 70 to 85% of salary in some instances as early as 50 with full healthcare are benefits unsustainable in a US service economy, ”

    What do you mean by “full health care” benefits? Our current retirees pay $75 for health care a month (before co pays, deductibles etc). However a spouse is an additional $300 monthly, each college age child costs $600. My retired colleague pays just under $1600 a month for the ‘full’ health care you rage against.

    You do know I’m sure, that in most states teachers do not pay into, nor are they eligible for, social security? If current teachers give up their future pensions, not only will they not get a pension, they also won’t get a dime of social security either. They’ll receive less social security than some retired part time pizza delivery dude. As a teacher, I’ve received a Social Security statement every year for 17 years. It still says I don’t qualify for any. I also care about government solvency, since, as impossible as this may be to believe, I too pay taxes. But dying penniless after working with literally thousands of children who still contact me to say ‘thanks’, seems like too much for you to ask of me. I’m afraid that sponsoring two clubs after school for free (even though my contract requires I get paid for it) and voting for this year’s pay freeze is the best I can do. Allowing me to keep my tiny two bedroom house when I retire doesn’t seem like too much to ask.

    We often hear that social security is unsustainable. You hear very few stories about people volunteering to give up their social security to help their government reduce costs. That is the equivalent of what you think teachers should do.

    Hey. You first.

    I’ve contributed to my pension as part of my salary. Do you think I should give up all those contributions? Maybe; after you relinquish your 401K to help out your employer who mismanaged your money. And after you relinquish your social security to help the government balance their books. And if your bank loses money, I hope you turn over what’s left of your account for the good of everyone (although its starting to sound communist now, isn’t it? I have to give up what I earned because YOU need it? But I digress).

    Teaching is my life’s work, I love it, I’m passionate about it, I’ve become skilled at it and I do not regret my choice. I have no complaints about pay or benefits; only about uninformed militant screes from trolls in forums such as this.

    Brandishing about a few extreme unsourced examples of retirement benefits, instead of using published facts shows a lack of concern about what is actually true. It reveals some sad, crazy anger, in search of an easy target. Quoting some opinion piece proves nothing except that your source can state their baseless rage more eloquently than you can.

    So quit searching every night for teacher pension stories. Spend your time donating your 401K back to your employer, including your contributions. And, as your singular courageous act on behalf of tax payers everywhere, tell the feds you will not be accepting any social security checks. Then tell me what to do.

  • L Booker says:

    Get em B. Martin…

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