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Better Pay, Fairer Pensions III — The Impact of Cash-Balance Pensions on Teacher Retention and Quality

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Better Pay, Fairer Pensions III — The Impact of Cash-Balance Pensions on Teacher Retention and Quality

June 22, 2016
Public SectorPension Reform
EducationPre K-12

Abstract

Most U.S. public school teachers participate in traditional “final-average-salary-defined-benefit” (FAS-DB) pension plans. In these plans, teachers earn relatively meager retirement benefits during their first several years in the classroom and then rapidly accrue far more valuable benefits late in their careers, as they near their plan’s retirement eligibility threshold.

Key Findings

  • A previously released paper by the authors found that rational entering teachers would strongly prefer a “cash-balance” (CB) pension plan (which would provide the same investment and longevity protection as an FAS-DB plan but would allow teachers to earn retirement benefits more evenly across their careers) to currently offered FAS-DB plans; however, research offers little guidance on the effect of moving to a CB plan on teacher quality.
  • Given the findings from previous research for the relationships between teacher attrition, teacher quality, and longevity, our simulations suggest that switching to a CB pension plan would be expected to slightly increase a school system’s total level of teacher experience—and thus, slightly increase the school system’s total level of teacher quality.
  • CB plans also would greatly benefit new teachers and would be cost-neutral for taxpayers, strengthening the case for cash-balance pensions.

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