Yes, We Have No Bananas



By 02/08/2010

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In a recent Education Next article, “Golden Handcuffs,” we talked about winners and losers in teacher pension systems, and about the huge costs these systems impose on mobile teachers due to the back-loading of benefits.  Consider one example.  In Missouri, a 25-year old entrant into the teaching profession receives net pension wealth equal to 33% of her cumulative earnings if she teaches until age 55, but her net pension wealth will be equal to only one percent of her earnings if she leaves at age 35. Yet in both cases, her employer contributed 12.5 percent of earnings into the pension fund each year.

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.

CosPod_Banana




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