The Cost Of Teacher Pensions

Yesterday, education economist (and Show-Me Institute Board Member) Michael Podgursky had a commentary published in The Washington Times about the costs of teacher pensions on governments and how school administrators gain the most from the status quo. This is due to the way most school pension benefits are calculated.

Currently, Missouri teachers participate in a defined benefit plan. Their pension benefits are calculated by averaging several years of that employee’s highest salary, not by averaging the salary of the employee over his or her entire career. This benefits administrators, who tend to get a big boost in average salary after they move from teacher to administrator. According to Podgursky’s calculations, a school superintendent will end up contributing 53 percent more to his or her pension plan than a senior teacher would over the course of his/her career, but receive 89 percent more in benefits.

On the other hand, new teachers do not benefit as much because their starting annual salaries are lower than a “senior” teacher. Again, according to Podgursky’s calculations, these novice teachers will contribute 30 percent of what a senior teacher does, but only expect 18 percent of the benefits. Novice teachers will eventually become senior teachers and these differences will all even out … if they remain teachers. However, as Podgursky notes, those who leave early rarely collect their benefits.

Because school administrators benefit the most from these types of plans, they have little incentive to insist on changes, even though they can be burdensome on the district and taxpayers.

The fundamental problem with Missouri’s defined benefit plans is that they do not directly tie an employee’s contributions to his or her benefits. Podgursky notes that “cash balance” plans address some of these problems. Personally, I prefer defined contribution plans. They’re personal, portable, and for the employer, there is no ongoing liability once the employee leaves. Whether it is a cash balance plan, or a defined contribution plan, some type of reform is needed.