Scrambling the Nest Egg: How well do teachers understand their pensions and what do they think about alternative pension structures?

Michael DeArmond & Dan Golhaber
National Center on Performance Incentives
February 2009 

Though released last winter, this report from the National Center on Performance Incentives is especially timely for the state of Ohio, where the State Retirement Teacher System (STRS) is facing serious fiscal liabilities and skepticism from lawmakers (see video above).  “Scrambling the Nest Egg” uses 2006 survey data from Washington state to explore: 1) How well do teachers understand their pension plans and 2) What do they think about alternative retirement plan structures?

The authors link survey results (to what extent teachers understand their pensions, and what type they say they prefer) to school and district characteristics. They found that teachers are fairly knowledgeable when it comes to their pension plan, although new teachers appear less knowledgeable than veterans. The data also reveal that teachers show a preference for investing additional retirement savings in alternative plan structures, such as defined-contribution (DC) plans, which offer more portability, choice, and risk than more traditional defined-benefit (DB) plans. Moreover, newer teachers are far more likely to favor DC contribution systems than DB plans.

The answers to the questions sought out by this report are critical because pension structure can support (or hinder) effective staffing by informing who decides to teach, when they teach, and where they teach. Under current DB plans participants are eligible to receive benefits only when they have taught in their state long enough to become vested (usually after five years), which encourages longevity, but discourages people from becoming teachers if they plan on changing careers or moving out of state.

DC plans, on the other hand, could attract new teachers because these arrangements do not penalize people who leave the system early or move between jobs. Also, DC plans do not create sharp incentives for teachers to retire at a particular time or age, which could help retain effective veteran teachers who, otherwise, may be encouraged to retire while still in their early to mid fifties.

Ohio lawmakers should pay attention to the results found in this report, and consider moving toward a DC teacher pension system. Not only would a portable pension system help recruit promising teachers to the profession and minimize the perverse incentives of the current setup (see Fordham’s report on incentives here), but it is a reasonable solution when the current STRS is facing financial instability. See the report here.

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