Robbing Peter To Pay For Paul’s Pension

As first appearing in the Columbia Missourian on November 18, 2013:

Peter and Paul are friends. They went to the same college, majored in education, and graduated the same year. Peter began teaching in the Jefferson City School District and Paul joined the faculty in the Hickman Mills School District. After working for 30 years, both retired. Little did they know that over the course of their careers, the defined benefit pension system had been robbing Peter to pay for Paul’s retirement.

Teachers in Jefferson City (Peter) start at a slightly higher salary than teachers in Hickman Mills (Paul) and they continue to earn a higher salary for 23 years. However, toward the end of their careers, Hickman Mills teachers receive larger pay raises and surpass their Jefferson City counterparts.

Over the course of a 30-year career, a teacher in Jefferson City will earn $29,213 more than a Hickman Mills teacher. Each of these districts is part of the Public School Retirement System of Missouri (PSRS). This system requires 29 percent of a teacher’s salary be contributed to the pension system, 14.5 percent each from the employee and the employer. Assuming a constant 29 percent contribution rate, a Jefferson City teacher will have $8,472 more deposited into the pension system than a Hickman Mills teacher.

Because they deposit more into the retirement system, it would make sense for the Jefferson City teachers to earn more in retirement, but that is not the case. Pensions in the PSRS system are based on a teacher’s three highest consecutive salaries, usually his or her last three years. The spike at the end of their career gives Hickman Mills teachers a higher final average salary, meaning they will earn more in retirement than the Jefferson City teachers.

Despite paying $8,472 more into the pension system, the Jefferson City teacher will receive $55,080 less than the Hickman Mills retiree over the course of a 30-year retirement.

This is a clear problem. Indeed, Missouri’s teacher retirement system is rife with problems. The end result is escalating payments by the state or declining benefits for pensioners. Since 2004, Missouri teachers have seen their contribution rate increase eight times, rising steadily from 21 percent to the current 29 percent. These increases are necessary to combat growing pension liabilities.

The problem with PSRS and many other public employee pension systems in Missouri is that they do not tie an individual’s contributions to his or her pension wealth accrual. That is, what you put into the retirement system is not related to how much you get out of the retirement system. That is why Peter can contribute more, but receive less.

The current pension system is flawed and unfair for teachers in Jefferson City and other districts that are robbed to fund the pensions of teachers in other districts. It is time to stop robbing Peter to pay Paul’s pension. It is time to fix our pension problems.

James V. Shuls, Ph.D., is the education policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.