Robert M. Costrell - IA de Investigación especializada en el MIT

Roberto M.. Costrell

(Autor correspondiente)

Departamento de Educación

Reform

University of Arkansas
Fayetteville, AR 72701

costrell@uark.edu

Michael Podgursky

Departamento de Economía

Universidad de

Missouri-Columbia
Columbia, MO 65211

podgurskym@missouri.edu

Fellow, George W. Arbusto

Instituto

Southern Methodist University

Dallas, Texas 75205

INTRODUCTION TO “RETHINKING

TEACHER RETIREMENT BENEFIT

SYSTEMS”

INTRODUCCIÓN

1.
Teacher retirement beneﬁts are a large and growing
component of teacher compensation.1 Unlike teacher
salaries, retirement beneﬁts have been little studied un-
til recently, despite their importance in school budgets.
As with salaries, the key policy issues fall under two
encabezados: teacher quality and education ﬁnance. Este
special issue is timely, as both of these dimensions of re-
tirement policy are now on policy makers’ radar screens.
Específicamente, as more states adopt performance-based
salary structures (in part spurred by federal encourage-
ment of new human resource policies) the question
naturally turns to whether retirement beneﬁts are also
structured to maximize the quality of the teacher work-
fuerza. As Costrell and Podgursky (2009) espectáculo, maestro
pension plans provide strong incentives to follow a spe-
ciﬁc career path that may be well suited to some but
not others. Beneﬁts are typically structured to “pull”
teachers to work until their early or mid-ﬁfties and then
“push” them into retirement. Thus some teachers in
their forties may ﬁnd themselves better suited to a ca-
reer change but hang on for their pension, while some in
their ﬁfties may still have good years to offer but retire
prematurely. The impact on teacher quality (as com-
pared, Por ejemplo, to plans with a more age-neutral
pattern of incentives) remains to be determined.

1. Retirement beneﬁts include pensions and other postemployment beneﬁts, notably retiree health
insurance. Although we refer to “teacher” retirement systems, these systems include other education
professionals as well—for example, directores, central ofﬁce professionals, and counselors. Classiﬁed
staff (p.ej., secretaries, maintenance) may or may not be covered by the same plans.

C(cid:2) 2010 American Education Finance Association

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RETHINKING TEACHER RETIREMENT BENEFIT SYSTEMS

Al mismo tiempo, the ﬁscal impact of teacher pensions and retiree health
insurance has suddenly burst into the news with the emergence of large
unfunded liabilities that threaten to absorb large and growing shares of K–12
education budgets.2 The conﬂuence of these two developments raises this
policy question: as the crisis in retirement beneﬁt funding forces policy makers
to consider reforms for ﬁscal reasons, is this also an opportune time to examine
the consequences of these systems for school stafﬁng and educator quality?

The research literature on teacher retirement beneﬁts is remarkably slen-
der. To be sure, there is a large literature in economics, dating back to the
1980s, studying the behavioral impact on retirement decisions of deﬁned
beneﬁt (DB) pensions offered by private employers and Social Security. Eso
literature, sin embargo, waned somewhat with the decline of private sector DB pen-
siones, and teacher pensions never received much research attention.3 Teacher
pensions now represent the primary remaining territory on the shrinking DB
landscape (with educators outnumbering other state and local employees). En-
deed, until recently many states continued to enhance DB beneﬁts for teachers
and other public employees.

To help address this gap in the literature, in February 2009 we organized
a research conference, “Rethinking Teacher Retirement Beneﬁt Systems,"
hosted by the National Center on Performance Incentives (NCPI) at Vander-
bilt University’s Peabody College.4 Papers were presented by authors with
expertise on pensions in a variety of relevant disciplines, including economics,
political science, law, and public policy.5 This special issue of Education Fi-
nance and Policy includes selected papers from that conference that have gone
through a peer-review process. We served as guest editors for this issue, trabajar-
ing closely with Tom Downes.

2. THE ARTICLES
Janet S. Hansen’s article, “An Introduction to Teacher Retirement Bene-
ﬁts,” provides a brief history of teacher pension plans and explains their
general structure today. This includes their governance, legal environment,
and beneﬁt formulas as well as their ﬁscal health and ﬁnancial accounting
practicas, as reported in national surveys. Hansen documents the divergence
that has emerged between teacher and private sector plans, which are now

Ver, Por ejemplo, Pew Center on the States (2010).

2.
3. One notable exception is Furgeson, Strauss, and Vogt (2006).
4. NCPI is funded by the Institute of Education Sciences in the U.S. Departamento de Educación. El
Department of Education Reform at the University of Arkansas provided additional support. For an
interpretive summary of the conference, including articles and commentaries not included in this
special issue, see Hansen, Podgursky, and Costrell (2009).

5. Discussants and posted commentaries also included perspectives of the actuarial community,

unions, and teacher pension plans.

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Rober t M. Costrell and Michael Podgursky

predominantly deﬁned contribution (corriente continua). After providing an overview of the
policy issues of ﬁscal sustainability, portability, and teacher workforce compo-
posición, Hansen proposes to move the debate beyond the familiar arguments
over DB versus DC to a more fruitful discussion of objectives and plan design
and to extend consideration to hybrids such as cash balance (CB) planes.

Robert L. Clark surveys the main non-pension retiree beneﬁt in “Retiree
Health Plans for Public School Teachers after GASB 43 and 45.” The title
refers to a change in accounting requirements that now lead public employers
to disclose the liability of retiree health plans (as had previously been required
for pensions). This has recently brought to light large unfunded liabilities;
unlike pensions, it has been rare for these plans to have any signiﬁcant degree
of pre-funding. The costs of retiree health beneﬁts are increased by teacher
pension plans that encourage early retirement, since retiree health insurance
primarily bridges the years from retirement to Medicare eligibility at age 65.
By examining each state’s actuarial reports, Clark documents the size of the
liabilities and the wide degree of variation across states due to differences in
the employer subsidy for premiums (de 0 a 100 por ciento), co-payments, y
the like.

The next set of articles turns speciﬁcally to the structure of pension ben-
eﬁts and their implications for labor market behavior. Leora Friedberg and
Sarah Turner review the labor economics literature mentioned above on the
behavioral impact of DB pensions. Específicamente, their article, “Labor Market Ef-
fects of Pensions and Implications for Teachers,” shows that it has been long
established that incentives embedded in the pattern of pension wealth accrual
under private DB systems have unmistakable effects on retirement decisions
(although the effects on recruitment and early career behavior have been harder
to discern). These effects have lowered and then raised the average age of re-
tirement in the economy, as DB plans have waxed and waned in the private
sector. Turning to teachers, from descriptive data on their relatively early re-
tirement ages, Friedberg and Turner ﬁnd indications that they also respond
to pension incentives. They lay out a research agenda to gauge the behavioral
respuesta, with particular emphasis on indicators of teacher quality.

Roberto M.. Costrell and Josh B. McGee apply the previous literature’s em-
pirical methods described in Friedberg and Turner to teacher data in Arkansas.
Exploiting a newly constructed data set linking longitudinal administrative data
to pension records, they are able to examine the behavioral response to the
structure of pension beneﬁts in “Teacher Pension Incentives, Retirement Be-
havior, and Potential for Reform in Arkansas.” They ﬁnd that teachers respond
to that system’s sharp pension incentives, much like other workers. Costrell
and McGee then use their parameter estimates to simulate a cohort’s response
to the elimination of early retirement and raising the service requirement for

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395

RETHINKING TEACHER RETIREMENT BENEFIT SYSTEMS

normal retirement. They also simulate the response to replacing the DB system
with a CB system of constant accrual. In both simulations, the responses in-
volve the push and pull incentives, with the CB system predictably smoothing
out the pattern of retirements.

Por supuesto, not all teachers respond to ﬁscal incentives, since other fac-
tors are also important, but these teachers pay a price for doing so. Roberto
METRO. Costrell and Michael Podgursky estimate that price in “Distribution of
Beneﬁts in Teacher Retirement Systems and Their Implications for Mobil-
ity.” Speciﬁcally, this article provides quantitative measures of the degree of
pension wealth redistribution from young job changers to career teachers,
compared with a neutral system of constant accrual (such as a CB plan). It also
quantiﬁes the penalty in pension wealth for teachers who cross state lines in-
stead of spending their full career in one system. In both cases the magnitudes
are often quite large, redistributing approximately half a cohort’s net pension
wealth and penalizing geographically mobile teachers hundreds of thousands
of dollars.

The ﬁnal three articles consider factors that frame any possible pension re-
forma. The ﬁrst is what teachers want. Michael DeArmond and Dan Goldhaber
collected pertinent survey data in the state of Washington in 2006 linked to
administrative records, and their analysis is reported in “Scrambling the Nest
Egg: How Well Do Teachers Understand Their Pensions, and What Do They
Think about Alternative Pension Structures?” Washington’s pension system
is well suited to exploring these issues because it has multiple pension plans
(depending on date of hire) and now has a hybrid structure, with both DC
and DB components. Teachers were asked basic questions about which plan
they were in (most of them answered correctly) and also hypothetical ques-
tions about how they would allocate additional beneﬁts between DB and DC
componentes. Younger teachers tilted more toward DC than did veterans.

The next article addresses the political dimension of teacher pensions and
possible reforms. Frederick M. Hess and Juliet P. Squire examine several case
studies in “‘But the Pension Fund Was Just Sitting There . . .': The Politics of
Teacher Retirement Plans.” The authors consider such political factors as the
legislative temptation to push current costs off to the future and to address
the interests of concentrated lobbies versus diffuse public interests. Hess and
Squire examine the role of these factors in the pension politics of New Jersey,
Oregón, and San Diego, California. They ﬁnd that the impact of these factors
differs subtly between the two issues identiﬁed in this issue: ﬁscal stewardship
versus structural reform, with the former proving more tractable, especially in
times of ﬁscal crisis.

The ﬁnal article, Amy B. Monahan’s “Public Pension Plan Reform: El
Legal Framework,” addresses the question of legal restrictions on legislative

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Rober t M. Costrell and Michael Podgursky

changes to public pension plans. States have a variety of legal frameworks for
pension protection, including contractual interpretations and constitutional
provisions. The main substantive issue, sin embargo, is readily identiﬁed: future
pension wealth accruals of current employees. In general there is no legal
obstacle to adopting a new pension plan for new employees, and it is almost
always legally impossible to abridge past accruals of current employees. El
large middle ground is future accruals of current employees. Monahan rec-
ommends that state pension law be reformed along the lines of federal law,
where protection is restricted to past accruals, allowing employers the same
ﬂexibility on future accruals that they already have on future salary increases,
employment, and other beneﬁts (such as health insurance).

3. KNOWLEDGE GAPS AND DIRECTIONS FOR FUTURE RESEARCH
The articles in this issue add signiﬁcantly to the research base on teacher
retirement beneﬁts while highlighting the paucity of research and data on
this important topic. We do know that the costs of these beneﬁts represent a
large and growing share of school district budgets and teacher compensation
expenditures. Research in other sectors, and the limited research on public
school teachers, does establish that pension systems have signiﬁcant effects
on the timing of retirements. Sin embargo, we have very little evidence on how
pension policies affect teacher quality. There are several challenges to ﬁll this
void.

The ﬁrst is data. For policies with such signiﬁcance for public expenditures,
the publicly available data on teacher retirements and retirement beneﬁts are
remarkably limited. Por ejemplo, very few states report even basic descriptive
data on the retirement ages of active teachers, let alone important groups such
as math and science teachers.6

While many state K–12 education departments have developed sophisti-
cated longitudinal databases for teachers that permit the study of interdistrict
mobility and exits, very few states have linked these records to retirement sys-
tem data. Thus a state like Florida can report exit rates from public schools by
experience or age of teachers, but we do not know whether these are retire-
mentos. All we know is that a teacher who was on a public school payroll in year
t is not on the payroll in year t + 1. This is a serious limitation because exits
and retirements are two different things. Primero, a teacher can separate with-
out retiring. Many teachers make temporary or permanent exits from public

6. Data are reported on retirement ages, but that is simply deﬁned as age of ﬁrst pension draw. Hacemos
not typically know from these data whether such retirement immediately followed separation from
service or whether separation occurred earlier and was followed by inactive status until reaching an
age of pension eligibility.

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397

RETHINKING TEACHER RETIREMENT BENEFIT SYSTEMS

school classrooms. The vast majority of these are not retirements. Segundo, a
teacher can retire without separating. Most pension systems have provisions
that allow retired educators to continue teaching either part or full time after
retirement. Además, teachers also retire from one pension system and begin
teaching in another.

Articles such as Costrell and McGee’s show the value of such data for
education policy research. By estimating models of teacher retirement behav-
ior, researchers are in a position to simulate the workforce effects of policy
changes.7 As more reﬁned measures of teacher quality are developed (incluir-
ing classroom value added), it should be possible to estimate the effect of
pension rule changes on the quality of the teaching workforce and ultimately
on student achievement.

Además, linking such databases across states will allow us to broaden
our understanding of teacher labor markets. Por ejemplo, there is consider-
able anecdotal evidence about teachers who draw pensions at relatively young
siglos (to avoid negative accrual) and then move across state lines to resume
teaching in another system. Longitudinal data bases that link teacher records
and retirement information will allow more precise estimates of these ﬂows.
The second element of a pension research agenda is to focus on pension
wealth, which captures both the annual pension payment and also the number
of years it is collected. The articles in this issue highlight the importance of
estimating the accrual of pension wealth. The complex rules and formulae
in these systems can be distilled to a simple present value wealth measure.
Yet there has been surprisingly little research on teacher retirement beneﬁt
systems that employs this approach, even though it is commonplace in re-
tirement studies in other sectors. Pension wealth estimates have the value of
bringing greater transparency to the incentives created by complex pension
systems and how these incentives change over a teacher’s work life.

Such estimates also provide a more complete measure of compensation for
profesores. In surveying reports and studies issued by teacher pension systems,
we almost never encounter pension wealth estimates for teachers at various
points in their careers or calculations of the distribution of pension wealth
among system members. Actuaries who prepare such reports are perfectly
capable of presenting such statistics but are not typically asked to prepare
a ellos. This makes it all the more important for independent policy researchers
to undertake such analyses.

7. One dimension that has been neglected in the studies to date is the interaction between pension
wealth accrual of the teacher retirement system and of Social Security in those states where teachers
are in both. Another complication is the interaction between pension wealth accrual and the accrual
of wealth from retiree health beneﬁts.

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Rober t M. Costrell and Michael Podgursky

The penalties for educator mobility and potential remedies are important
topics for further research. Sin embargo, equally important, and to date largely
unexplored, are incentives for school administrators, who tend to operate
in larger regional or even national markets. The effect of these systems on
recruitment and retention of school administrators is sufﬁciently important to
justify separate studies focusing on this group.

A third element of a research agenda is the study of preferences of teachers
and potential teachers, following up on DeArmond and Goldhaber’s valuable
contribución. Future studies should probe the knowledge and preferences of
teachers in additional states. It is also important to examine various types
of educators. This would include teachers who enter the profession through
alternative routes, such as Teach for America, Troops to Teachers, Nueva York
Teaching Fellows, etc., as well as future teachers in the traditional supply
pipeline, especially in ﬁelds such as science and math. Another important
group is school administrators, particularly because superintendents are more
likely to switch pension systems during a career. Charter school teachers and
administrators are also of interest.

An underexploited method of ascertaining teacher preferences is to exam-
ine actual choices in systems where teachers have options, as in states that
offer hybrid and supplemental plans. This can be harder than it may appear
at ﬁrst sight because the playing ﬁeld between various options is not always
level in present value terms. Still, the available choices could be studied while
researchers press for better experimental options to be offered and evaluated.
A fourth challenge to a teacher pension research agenda is to develop the
essential information for evaluating funding. En principio, annual reports of
teacher pension funds (valuation studies) that are used to set required con-
tribution rates address this issue. Sin embargo, the sharp disagreement between
ﬁnancial economists and actuaries on the proper discount rate highlights the
importance of getting independent, and more transparent, assessments of the
viability of retirement systems.8 In fact, it is rare for annual pension reports
to provide sensitivity analyses to give readers some understanding of the ro-
bustness of their estimates to alternative assumptions about returns, earnings
growth, etc.9 Such analyses are essential to evaluating the common assertion
that an 80 percent funding ratio is “good enough.”

For policy purposes, it is imperative to develop models of teacher pension
systems—behavioral and ﬁnancial—that will permit simulations of alternative

Ver, Por ejemplo, Brown and Wilcox (2009).

8.
9. Novy-Marx and Rauh (2009) have begun to ﬁll this gap by reverse engineering the undisclosed
streams of pension payments inferred from the actuarial reports and applying discount rates for
instruments of comparable risk and maturity to those of the liabilities.

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399

RETHINKING TEACHER RETIREMENT BENEFIT SYSTEMS

reforms. Por ejemplo, since current systems effectively redistribute pension
wealth from younger, shorter-term teachers to older, longer-term ones, cómo
can states move to a more neutral system without incurring excessive transition
costos? Of particular importance will be the question of how the transition
costs/savings depend on the implementation, Por ejemplo, for new hires only
or for some form of conversion of future accruals of existing employees.

Finalmente, to be policy relevant, researchers need to be aware of the rapidly
changing environment. Even in the short period between the NCPI conference
(Febrero 2009) and this writing (Junio 2010), long-looming ﬁscal concerns
have erupted into a full-blown crisis. Although it is possible that the crisis
will pass without fundamental change (if the stock market booms), hay
other factors that could increase the ﬁscal pressures. Por ejemplo, GASB
(the Governmental Accounting Standards Board) has served public notice
that it intends to issue new standards on discount rates that go part way
toward the recommendations of the ﬁnance economists and will likely raise the
annual required contributions of plans with unfunded liabilities by substantial
amounts.

The legal environment may also change. States that are under ﬁscal duress,
already cutting beneﬁts and raising the retirement age for new hires with little
immediate ﬁscal relief, may well try to cut future accruals of current employees
for greater savings. The legality of such proposed measures is already being
vigorously debated in Illinois, a state that has previously been considered to
have one of the strongest constitutional pension protections.

En suma, teacher retirement beneﬁt systems are in a period of turbulence,
with major changes likely in coming years. Given the stakes involved—
for school budgets, educator stafﬁng and quality, y ultimamente, escuela
performance—it is critical that such changes be informed by scholarly re-
search in this area.

REFERENCIAS
Marrón, Jeffrey R., and David W. Wilcox. 2009. Discounting state and local pension
liabilities. Revisión económica estadounidense: Papers and Proceedings 99: 538–42.

Costrell, Robert M., and Michael J. Podgursky. 2009. Peaks, cliffs, and valleys: El
peculiar incentives of teacher retirement systems and their consequences for school
stafﬁng. Education Finance and Policy 4(2): 175–211.

Furgeson, Joshua, Robert R. Strauss, and William B. Vogt. 2006. The effects of deﬁned
beneﬁt pension incentives and working conditions on teacher retirement decisions.
Education Finance and Policy 1(3): 316–48.

Janet S., Miguel

Hansen,
j. Podgursky, and Robert M. Costrell. 2009.
Teacher retirement systems: Research ﬁndings. Available www.performanceincentives
.org/conference/Final ResearchBriefNCPIlayoutJuly20.pdf. Accedido 23 Junio 2010.

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Rober t M. Costrell and Michael Podgursky

Novy-Marx, Roberto, and Joshua D. Rauh. 2009. The liabilities and risks of state spon-
sored pension plans. Journal of Economic Perspectives 23: 191–210.

Pew Center on the States. 2010. The trillion dollar gap: Underfunded state retirement
systems and the roads to reform. Washington, corriente continua: Pew Charitable Trusts.

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