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Rethinking the Structure of Teacher Retirement Benefits

Many school districts face serious budgetary challenges tied to increasing costs of funding teacher pensions and healthcare benefits. In some states, legislatures are on the verge of having to increase revenues for schools, alter the level or structure of benefits, or both. Festering uncertainty about the legal parameters around employer-provided healthcare does not help policymakers facing such decisions. In contrast, a growing body of evidence points to the reasonableness and potential strategic wisdom of changing the way new entrants to teaching accrue pension benefits.

In an article published in Educational Evaluation and Policy Analysis, Josh B. McGee and Marcus A. Winters analyze data from two large urban districts, New York City and Philadelphia, to offer unprecedented insight on a factor that policymakers should probably fold into their deliberations, namely teachers’ preferences. The research is technical, and the evidence offered results from stylized statistical simulations designed to isolate the effect of teachers’ risk aversion on their preference for two  pension approaches. In one approach, benefits accrue with the existing back-loaded models used in New York City and Philadelphia, in which the value of the benefits climb rapidly toward the end of the teacher’s career. In the other, a so-called “cash balance” (CB) arrangement, benefits grow steadily, essentially mirror accumulated contributions and investment earnings at any point in time.

The upshot, in the authors’ words, is that “Given reasonable assumptions for how teachers view risk, the preference for a CB structure is very large indeed.” This conclusion doesn’t mesh very well with conventional wisdom about teacher pensions, something of a third rail in the political economy of K-12 schooling. The conventional wisdom hasn’t really absorbed major shifts in patterns of teacher retention over the past several decades. When considering major changes to teacher compensation and benefits, policymakers should consider the radically lower probability, relative to decades past, that entering teachers will remain in the classroom, and in the same state, for a full career. The carefully drawn comparisons in the article offers valuable insight in this sense.