Let’s say you are running a school district. Would you raise teacher compensation (salaries and retirement benefits) by 5-8 percent for all of those who stay less than 20 years in exchange for lowering compensation by up to 3.4 percent for 38-year veterans?
This is essentially the question posed in a new Manhattan Institute report by Josh McGee and Marcus Winters. McGee and Winters look at the potential implications for the 10 largest school districts in the country if they were to adopt two reforms:
- Jettison their current approach to retirement benefits in which teachers accrue relatively meager benefits through much of their careers, and then abruptly become eligible for much more as they near retirement age. In its place, districts should adopt retirement systems where benefits accrue smoothly, year after year, without sudden, arbitrary jumps late in a teacher’s working life.
- Increase the amount of teacher compensation that is paid directly as salary, and reduce the amount of compensation that is devoted to retirement benefits in order to match the norm for similarly situated workers in the private sector.
The chart below maps out how these two cost-neutral reforms would play out for teachers in New York City who begin teaching at age 25. (I’ve added “Winners” and “Losers” to show which teachers would benefit from the changes.) If teachers stayed three years, they would earn about 8 percent more. If they stayed 20 years, they would be 5 percent better off. If they taught 30 years? Still better off. Only if they retired between 31 and 44 years of teaching would teachers lose out from the reforms and, at most, if they taught exactly 38 years, they would be 3.4 percent poorer. Unlike the current system, which features large financial incentives for teachers to retire precisely at a pre-determined age (New York City teachers who begin at age 25 currently hit peak pension wealth at age 63), the new system would offer teachers a smooth wealth accrual that would allow them to time their retirement decisions as they saw fit.
The chart doesn’t suggest it visually, but it’s important to remember that teachers do not often stay in the profession or in the same school district for 30+ years. Nearly half of all teachers nationwide leave the profession before the end of their fifth year. A similar story plays out in New York City as well, where the majority of teachers leave well before their full pension benefits kick in. In other words, not only are the potential gains from McGee and Winters’ pension reforms bigger than the potential losses, but the percentage of teachers who could benefit from changes like these would far exceed the percentage of teachers who would potentially lose out.
As the authors make clear, the current defined benefit pension systems in place across the country do offer a higher maximum level of compensation for the minority of teachers who stay in the profession and remain in the same pension system for their entire careers. But the majority of teachers stand to significantly benefit from these two cost-neutral pension reforms. Read the full report here.