Who Benefits from Pension Enhancements?

“We’ve got it; let’s spend it!” seemed to be the motto of most state pension program in the 1990s.

“We’ve got it; let’s spend it!” seemed to be the motto of most state pension program in the 1990s. After finding surpluses in these kitties, most states beefed up their pension benefits (called “benefit enhancement”)—as opposed to putting the money in the bank. In Missouri—as this new study by pension guru Michael Podgursky and colleagues explains—these sweeteners included, but were not limited to, upping basic payouts (by tweaking the calculation of final average salaries), raising the cap on the cost-of-living adjustments (twice), and adding a retroactive bonus for career teachers (those with thirty-one-plus year of service). The state, and its current teachers, are now paying dearly for the spending spree. Podgursky and co. examined personnel data from 1995 through 2009 from the Missouri Dept of Ed and the Public Service Retirement system to determine the impact of these policies. They estimate that the net immediate increase in pension benefits for educators was roughly $25,000 per teacher (double that if the promised increases are factored in). However, these benefits were distributed highly unevenly: Teachers on the cusp of retirement saw “large windfall gains”—upwards of $100,000 in added pension wealth—with novice teachers receiving between 10,000 and 20,000 additional dollars. Worse yet for new (or prospective) teachers, these benefit enhancements meant a constant and aggressive increase in contribution rates (needed to offset past liabilities accrued from the sweeteners): Missouri has raised its contribution rate by a full percent for each of the last eight years, with total contribution rates (for teachers and districts) now standing at 29 percent. (The average state’s total contribution rate is about 25 percent.) In other words, newbie teachers are paying for higher benefit levels enjoyed by the previous generation (levels beyond what these veterans contributed to the system). Who says DB plans are less risky for the employee?

SOURCE: Cory Koedel, Shawn Ni, and Michael Podgursky, Who Benefits from Pension Enhancements? (Columbia, MO:  University of Missouri, Columbia, May 2012).

Amber M. Northern, Ph.D.
Amber M. Northern, Ph.D. is a Senior Vice President for Research at the Thomas B. Fordham Institute