New Body of Research on Teacher Retirement Systems Timely for Reform Efforts

FAYETTEVILLE, Ark.; A newly published journal issue offers analyses of how reform of teacher retirement benefit systems could affect not only school finance, but also teacher quality.

University of Arkansas professor Robert Costrell co-edited the special issue of the journal Education Finance and Policy that focuses on teacher retirement benefit systems. Education Finance and Policy is the official journal of the Association for Education Finance and Policy, formerly the American Education Finance Association.

The volume, available online and in print, was based on an academic conference held at Vanderbilt University last year and is the main source of research to date on the topic for state policymakers and researchers.

Costrell, who holds the Twenty-First Century Chair in Education Accountability at the University of Arkansas, and Michael Podgursky, professor of economics at the University of Missouri-Columbia, co-edited and wrote the introduction for "Rethinking Teacher Retirement Benefit Systems" published by MIT Press. Costrell also wrote two of the articles in the journal, one with Podgursky and one with Josh McGee, a research associate in the University of Arkansas department of education reform.

"The articles in this issue add quite a bit to the research base on teacher retirement benefits, but that base is still limited," Costrell said. "Teacher retirement benefit systems are in a period of turbulence, with major changes likely in coming years. Given the stakes involved – for school budgets, educator staffing and quality, and ultimately, school performance – it is critical that such changes be informed by scholarly research in this area."

The 2009 conference was organized by Costrell and Podgursky and hosted by the U.S. Department of Education's National Center on Performance Incentives at Vanderbilt, with additional support from the University of Arkansas department of education reform. The conference brought together scholars from a variety of disciplines – including economics, political science, law and public policy – from major research universities and research institutions across the country to analyze the design and implications of teacher retirement systems used in the American K-12 public education system. Unlike teacher salaries, retirement benefits have been studied little until recently, despite their importance in school budgets, according to the issue's introduction. Retirement benefit systems have important effects on the teacher work force, school staffing and school finance. While states and districts face rapidly rising costs for their existing retirement benefit systems, districts are also looking for ways to recruit and retain high-quality teachers in their continuing efforts to raise student achievement and decrease achievement gaps.

Papers from the conference published in the peer-reviewed special issue discuss whether existing retirement benefit systems are sustainable and whether there are better ways to spend the money to recruit, retain and motivate a high-quality teaching work force. Teacher retirement systems offer defined-benefit pensions, a structure that guarantees the participant a certain monthly payment after retirement, based on years of service and final salary. The private sector has moved away from the defined-benefit system in recent years in favor of defined-contribution plans that tie benefits to the contributions by employee and employer or to hybrid systems such as cash-balance plans, which also tie benefits to contributions, but do not shift risk to employees.

Previous research by Costrell and Podgursky shows that teacher pension plans provide strong incentives to follow a specific career path that may be well-suited to some teachers but not others. Benefits are typically structured to “pull” teachers to work until their early or mid-50s and then “push” them into retirement. Some teachers in their 40s may find themselves better suited to a career change but hang on for their pension, while some in their 50s may still have good years to offer but retire prematurely, Costrell and Podgursky wrote.

In their contribution to this special issue, Costrell and Podgursky show that the distribution of pension benefits is highly unequal: approximately half of an entering cohort's pension wealth is often redistributed from those who leave prior to their 50s to those who retire in their 50s, as compared to the uniform distribution under cash-balance plans. In addition, current systems impose large penalties – worth hundreds of thousands of dollars – on teacher mobility between states.

A number of states are trying to deal with large unfunded liabilities that threaten to absorb large shares of K-12 education budgets. Because this crisis may force policymakers to consider reforms for fiscal reasons, the authors suggest now is the opportune time to examine consequences of these systems on school staffing and educator quality.

Costrell and McGee examine the behavioral response to the structure of pension benefits in Arkansas in their article, finding that teachers respond to the sharp incentives much like other workers. Costrell and McGee simulate a cohort’s response to the elimination of early retirement and raising the service requirement for normal retirement. They also simulate the response to replacing the defined-benefit system with a cash-balance system of constant pension wealth accrual. In both simulations, the responses involve the push and pull incentives, with the cash-balance system predictably smoothing out the pattern of retirements.

Other articles in the issue provide a brief history of teacher pension plans and explain their general structure today, describe the wide degree of variation in retiree health insurance liabilities across states because of differences in employer subsidy for premiums, examine the implications of pension benefits for labor market behavior, and consider factors that frame possible pension reform, including teacher preferences, political dimensions and legal restrictions on legislative change.