Teacher Pensions: A Background Paper
July 16, 2008
Janet S. Hansen
Committee for Economic Development
This multi-faceted look at teacher pensions describes the most widely used current plans, their likely sustainability, which teachers benefit from them the most, and options for their redesign. It echoes many findings from our Ohio-specific report on the same topic by economists Michael Podgursky and Bob Costrell, and from the same authors' recent Education Next piece on this subject. Hansen, too, finds that defined benefit (DB) plans (in which retirement payouts are calculated primarily through years of service and final salary) ill-serve many of the educators covered by them--and these are the plans that cover most public-school teachers. Those who fare well under such plans must work for a very long time in the same state or district, while those who exit the profession early or take a teaching job elsewhere suffer acute pension penalties. She contends that the usual alternative to DB plans, namely defined contribution (DC) plans, which are widespread in the private sector, aren't the best answer for teaching. They carry their own issues; the major one is that plan participants, as opposed to sponsors, bear the most risk. Hansen recommends a hybrid called a "cash balance" plan, which she says offers the best of both the DB and DC approaches. It's no secret that teacher pension systems are out of sync with current labor markets and career patterns--and unsustainably expensive, too. This easy-to-digest report helps to explain why.