Breaking: pensions are unnecessary to attract good teachers

On a dollar for dollar basis, there’s much more risk involved in compensating a worker via a long term pension promise instead of salary or some other benefit expensed in the present. You know for certain how much money you have to spend now. You don’t, and can’t, know what fiscal position you’ll be in when someone retires in 20 years.

Two reports released late last week question whether the rewards are proportionate to the risk. They show that unpensioned teachers can be outstanding, and that upfront cash may function more efficiently as a hiring incentive.

The Equity Project is a New York City charter middle school that pays a base salary of $125,000 a year, plus performance bonuses that have recently reached $15,000 for some teachers. New York City teachers of comparable experience to Equity Project faculty make no more than $76,000. The Equity Project relies for its funding on public, per-pupil allocations just like any other charter or district school in New York City. Its novel compensation structure is made possible by pushing up class sizes to 31 students (27 is standard for a city middle school), and enlisting teachers to perform administrative duties. But it exercises more flexibility over class sizes and duties because it is non-union, and over resources because it does not have to spend money on pensions because Equity Project staff doesn’t get pensions.

Judged in terms of student outcomes, the school’s personnel management approach works powerfully. In a new report, Mathematica Policy Research found that

…compared to similar students in comparable New York City public schools, students who attended [The Equity Project (TEP)] for four years had test score gains equal to an additional 1.6 years of school in math, an additional 0.4 years of school in English language arts, and an additional 0.6 years of school in science. TEP’s cumulative effect on student achievement over four years is about 78% of the Hispanic-white achievement gap in math, 17% in English language arts, and 25% percent in science

How much do teachers even appreciate their pensions? That’s the question at the heart of the second report, by Cornell University’s Maria Donovan Fitzpatrick. It carefully examines what happened when Illinois in 1998 gave teachers the option to pay a one-time fee to boost their pension. The fee was a function of current salary and therefore differed between teachers, as did the benefit (a more generous rate of accrual). Of course, as price went up, so did the expected benefit. But teachers showed themselves to be far more sensitive to changes in their out of pocket expenses than in increases in the resultant long term benefit. By comparing how the takeup rate in the program changed relative to changes in both the price and the benefit it yielded, Fitzpatrick measures how much more valuable cash is to pensions: “employees on average prefer an increase in current wages of just over $2 to a $10 increase in the [present discounted value] of annuitized wealth in their retirement package.”

In other words, the defined benefit approach is fundamentally inefficient. The sacrifices governments and taxpayers make to make good on pension promises are out of proportion to how much pensions help them compete in the labor market.

At bare minimum, these studies push back on the contention that the recent wave of pension reform will stymie efforts to attract talent into the public sector. School budgets are overwhelmingly compensation. All things begin equal, less generous pension benefits should result in higher salaries. If so, teacher quality will not only not suffer, it will improve.

Comment (1) Add yours ↓
  1. Tim Ruese

    So, Steve does this mean you are in favor of 125,000$ pay for teachers with 401K matching 6%. I would come back and teach for that.

    October 29, 2014 Reply

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