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Commentary By Marcus A. Winters

The Hidden Bill Young Teachers Pay

Education, Governance Pre K-12, Public Unions

Young teachers lose out because they're paying for the retirement of those who came before them.

Where does your paycheck go? Your compensation is spread over not just salary but also retirement and other benefits. State and local governments take their share, of course. But for public school teachers in many areas there is another (hidden) line item: paying for the retirement of those who came before them.

“Teacher pension systems already transferred money from younger to more experienced teachers before these systems became underfunded.”

By now we are all familiar with the crushing debt facing many states due to unfunded pension liabilities, much of which is tied to promises made to teachers. Pension benefits were too generous, assumed rates of return on investments too high and contributions to cover future obligations too low. These policy failures have caught up to us. Many states and localities have been forced to make difficult budget decisions, and some are on the verge of bankruptcy.

Someone has to pay for these debts. To a large extent policymakers have asked young teachers to make up for the deficit that their predecessors and shortsighted budgeting caused. In a recent paper for the Center for Analysis of Longitudinal Data in Education Research, a team of economists calculated that 10 percent of the earnings for an average public school teacher goes toward paying for pension liabilities accrued on the behalf of prior cohorts of teachers. That's money they could be taking home in salary.

The contribution made by younger teachers is so high in part because their more experienced counterparts shoulder very little of the burden. States have increased vesting periods and employee contribution amounts for new teachers while leaving the plans for current retirees constant. A recent report by Bellwether Education Partners showed that these and other changes disproportionately affect younger and future teachers compared to those who have already worked for several years.

Reductions in compensation for young teachers are only making a longstanding problem worse. Teacher pension systems already transferred money from younger to more experienced teachers before these systems became underfunded.

Most professionals earn yearly retirement compensation based on a proportion of their annual salary. Not teachers. Because their defined benefit systems base yearly retirement income on a proportion of their salary at the time they exit the system, most teachers earn very little retirement compensation for each of their first two decades of teaching and then suddenly accrue large amounts of pension wealth during their late career years. The vast majority of teachers leave the system before they receive the large payouts. The money those who exit leave on the table goes to fund the comfortable retirements of the few who stuck around for their entire career.

This backloaded structure of the compensation system increases the premium that school systems pay for more experienced teachers. In a study for the Manhattan Institute, Joshua McGee and I show that the premium paid to experienced teachers relative to younger teachers in the form of retirement compensation sometimes dwarfs that of the difference in their salaries. For example, a teacher in Houston earns about $16,000 more in salary and about $44,000 more in retirement benefits in her 35th year than does a teacher in her 15th.

“States need to fulfil their promises to current retirees. But that burden should be shared rather than being tossed on the shoulders of a new generation of teachers.”

States need to fulfil their promises to current retirees. But that burden should be shared rather than being tossed on the shoulders of a new generation of teachers. In addition to simple fairness, we can't expect to attract and retain high quality teachers if we continue to cut their pay.

Just as importantly, it's time for policymakers to reform the system so that future pension plans remain funded and are more equitable across generations. An important part of solution is to link teachers to individual retirement accounts. That can be done by adopting 401(k)-style defined contribution plans common for private-sector professionals. Alternatively, cash-balance plans are a type of defined benefit that offers guaranteed investment returns and is offered as a lifelong yearly payment, but ties retirement compensation each year to a proportion of the individual's yearly salary. Having to put actual money into each teacher's retirement account each month would remove the ever-present temptation for policymakers to use today money that needs to be set aside to fund future retirees.

This piece originally appeared in U.S. News & World Report

This piece originally appeared in U.S. News and World Report