Teacher Pensions, Incentives,
and Labor Market Behavior:
A Descriptive Analysis
Michael Podgursky, University of Missouri - Columbia
Robert Costrell, University of Arkansas – Fayetteville
Mark Ehlert, University of Missouri- Columbia
Center for Analysis of Longitudinal Data in Education Research (CALDER)
National Center for Performance Incentives (NCPI)
REL Directors Meeting
Washington DC
Feb. 7, 2008
1
Why study teacher retirements?
• Teacher retirements generate vacancies
• Teacher retirements generate costs
– Teacher pensions
– Retiree health insurance
• Incentives in retirement systems may have
significant effects on labor supply and mobility
– Pension system incentives are large
• Retirement systems can affect the quantity and
quality of the teaching workforce
2
New Vocabulary for Ed Policy and
School Finance
•
•
•
•
•
•
OPEB’s
UAAL
PLOP, DROP
Present value
Discount rates
GASB 43,45
3
Recent Reports
• Promises with A Price: Public Sector Retirement
Benefits (Pew Foundation)
–
http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/State_policy/pension_report.pdf
• Funding Pensions and Retiree Health Care for Public
Employees California Public Employee PostEmployment Benefits Commission
– http://www.pebc.ca.gov/images/files/final/080107_PEBCReport2007.pdf
4
Fiscal Context: Increasingly Expensive
Ohio Teacher Retiree Benefit Costs
Figure 1. Employer and Employee Contributions to STRS
increase
proposed
by STRS
30.00%
25.00%
employee
15.00%
10.00%
employer
5.00%
0.00%
19
20
19
23
19
26
19
29
19
32
19
35
19
38
19
41
19
44
19
47
19
50
19
53
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
20
10
percent of salary
20.00%
note: employer contribution includes a contribution to retiree health care fund
5
Research literature
• Large labor economics literature on pensions and retirements
• Very small literature on teachers
– Furgeson, Strauss, Vogt (2006), PA teachers
– Brown (2006), CA teachers
– Harris and Adams(2007), CPS
• Absence of basic data
– Character of systems (incentives)
• Type of benefits and costs (esp. retiree HI, NCS)
• Parameters of systems (NEA and NASRA incomplete, Loeb and Miller,
2006))
• Incentive structure of teacher pensions
– Teacher labor market data
• HRS (too small for teachers)
• SASS TFS
• Longitudinal state data (SEA records linked to pension data)
6
Teacher Pensions:
Stylized Facts
• Mostly state-wide systems
• Roughly 70 percent of teachers are in Social
Security. Generally state decision.
• Nearly all teachers are in Defined Benefit (DB)
plans. DC and CB options very limited
– DC = Defined Contribution (e.g., IRA)
– CB = Cash Balance
• Mean retirement age is well below Social
Security and Medicare ages
– 58 years (retired and stopped teaching, SASS TFS)
7
Incentives in Teacher Pension
Systems
•
•
In public sector DB pension systems accrual of
pension wealth is highly non-linear and backloaded
State systems generally have sharp “spikes” in
accrual rates
–
–
•
Pull teachers to spike
Push out after
Not inherent in DB pension systems.
–
–
“cash balance” (IBM and other firms)
Can smooth spikes
8
Typical DB teacher pension
Annual
Pension = S x FAS x r(S,A)
S = service years
FAS = final average salary
r(S,A) = replacement factor
When do payments start? (A/S)
9
Table 1
Key Features of Selected State Defined Benefit Teacher Pension Plans
Lots of moving parts…
Ohio
Arkansas
California
Massachusetts
Missouri
Florida
In Social
Security
No
Yes
No
Yes
No
No
Vesting (years)
5
5
5
10
5
6
Retirement
Eligibility
Age=60; or
Age=55 if Service =
25; or
Service = 30
Age = 60; or
Service = 25
Age = 55; or
Age = 50 if Service
= 30
Age = 55; or
Service = 20
Age = 60; or
Service = 30; or
Age + Service = 80
Age=62; or
Service=30; or
Age<62 and
Service<30 w/ 5%
reduction in
annuity for every
year under 62
Contribution Rates
District 14%
Teacher 10%
Employer 14%
Teacher 6%
District 8.25%
Teacher 6%*
State, varies
Teacher 11%
District 11.5%
Teacher 11.5%
State, varies
District 8.69%
Teacher 0%
Replacement factor
(percent per year of
service)
Yrs 1-30: 2.2%
Yr 31: 2.5%
Yr 32: 2.6%, …
For S ≥ 35,
add 6% to total
For S < 30 and age <
65, adjustment %
applies
2.15% + $900
For S < 28, benefit
reduced 5% x (28-S)
Linear segments:
1.1% at age 50
1.4% at age 55
2.0% at age 60
2.4% at age 63
For S ≥ 30, add
0.2% to factor, to
max of 2.4%
Linear:
0.1% at age 41 to
2.5% at age 65
For S ≥ 30,
add 2% x (S-24)
Max replacement =
80%
2.5%
Linear Segments:
1.60% at or before
age 62 or 30 years
1.63% at age 63 or
31 years
1.65% at age 64 or
32 years
1.68% at age 65 or
33 years
COLA formula
3%, simple
3%, simple
2%, simple, plus
floor of 80% initial
purchasing power
CPI to max of 3%,
simple,
on first $12,000
CPI, compound, up
to 1.80 maximum
factor
3% Compound
Sources: State pension fund web sites.
* An additional 2% contributes to a supplemental defined contribution plan.
10
Pension Wealth
(Annuity)
Pension
Payment
Pension
Wealth
11
• Compute pension wealth at each year of
work life
• Compute growth of pension wealth from
an addition year of work
• Representative teacher
– Enters at 25, continuous spell of work
– Standard assumptions concerning PV of
pension wealth. (see Costrell and Podgursky (2007) )
12
Ohio, Columbus Teacher Salary Schedule
Figure 3. Pension Wealth, in Inflation-Adjusted Dollars
age of first pension draw indicated
$1,400,000
62 63 64
60 61
65
$1,200,000
adjusted for inflation, $2007
59
$1,000,000
55
56
57 58
55
$800,000
Age of pension draw
55
55
$600,000
55
55
$400,000
$200,000
60 60 60
60 60 60 60
60 60
60 60
60
60 60
60
60 60
60
60
Age at separation
$25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
age at separation (entry age = 25)
(Assumptions: 2006-2007 Columbus Public Schools Salary Schedule, all cells assumed to grow at 2.5% inflation,
COLA = 3%, interest rate = 5%, unisex 2003 Mortality Table from IRS Revenue Ruling 2002-62 Appendix B.)
13
Ohio
Figure 4. Pension Wealth as Percent of Cumulative Earnings
age of first pension draw indicated
45%
40%
56
55
35%
55
60
57 58
61
59
62
63
percent of cumulative earnings
64
55
65
30%
55
55
25%
55
20%
15%
10%
60 60
60 60
60 60
60 60
60 60
60 60
60 60
60 60
60 60
60
60
5%
0%
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
age at separation (entry age = 25)
(Assumptions: see Figure 3)
14
Figure 5: Annual Deferred Income, in Inflation-Adjusted Dollars
age of first pension draw indicated
$125,000
$100,000
adjusted for inflation, $2007
$75,000
55
55
60
55
Addition to pension wealth
from an additional year of
Teaching (in dollars)
55
55
55
$50,000
$25,000
60 60 60 60 60 60 60
60 60
60
60
60
60 60 60
60 60 60 60
56 57 58
$25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
59
61 62
$(25,000)
63
64
$(50,000)
65
$(75,000)
age at separation (entry age = 25)
(Assumptions: see Figure 3)
15
Figure 6. Annual deferred income, as % of earnings
age of first pension draw indicated
200%
55
55
60
percent of salary
150%
Addition to pension wealth
from an additional year of
Teaching (as % of earnings)
55
55
55
100%
55
50%
0%
60 60 60 6060
60 60 60
60
60
60
60 60 60
60 60
60 60 60
56 57 58
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
59
61
-50%
62 63
64
age at separation (entry age = 25)
(Assumptions: see Figure 3)
16
17
Increment to PV of Pension Wealth from Working an Additional Year:
Missouri
200%
53
54
150%
55
56
percent of salary
57
53
100%
58
59
50%
60 60
6060
60 60
60
60 60
60 60 60
60 60
60
After 2001
56
54 55
0%
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
Before 2001
57
-50%
58
59
60 61
62 63
age at separation (entry age = 25)
18
64
Figure 2B. Annual deferred income: Arkansas
age of first pension draw indicated
500%
50
400%
percent of salary
300%
200%
100%
51 52 53
60 60 60 60 60
60 60 60 60
60
60
60
60
60
60
60
60
60 60
0%
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
-100%
age at separation (entry age = 25)
Source: Costrell and Podgursky (2007)
19
Figure 2C. Annual deferred income: Massachusetts
age of first pension draw indicated
300%
55
since
2001
250%
percent of salary
200%
150%
100%
56 57
50%
55 55 55
55 55 54
55 55 55 55
54 54 54 54 54 54
58
54 54 54 55 56 57 58
59 60
prior to
2001
61
62
0%
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
59
-50%
60 61 62 63 64 65
-100%
age at separation (entry age = 25)
Source: Costrell and Podgursky (2007)
20
Figure 2D. Annual deferred income: California
age of first pension draw indicated
200%
56
150%
percent of salary
since 1999
100%
56
57
50%
57 57 57 57 57
57 57
57
57 57 57 57
57 57 57 57 57 57 57
57
57 57
57
57
57 58
59 60 61
57
prior to
1999
62
0%
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
61 62
-50%
63
64 65
age at separation (entry age = 25)
Source: Costrell and Podgursky (2007)
21
Figure 6. Annual deferred income, as % of earnings
age of first pension draw indicated
200%
Ohio
55
55
60
150%
55
percent of salary
55
55
100%
55
50%
0%
60 60 60 6060
60 60 60
60
60
60
60 60 60
60 60
60 60 60
56 57 58
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
59
61
-50%
62 63
64
age at separation (entry age = 25)
(Assumptions: see Figure 3)
22
Figure C2. Deferred Income as Percent of Salary: Entry ages 22, 25, 30
400%
350%
300%
percent of salary
250%
30
200%
25
22
150%
100%
50%
0%
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
-50%
-100%
age at separation
(Assumptions: see Figure 3)
23
Intended Consequences
• Do pension incentives affect retirement
behavior?
24
Missouri Longitudinal Teacher Data File
(excluding KC and STL districts)
2005-06
1990-91
A + E ≥ 45
Full-Time
Teachers
N= 31,060
21,240
Retirements
25
Distribution of Age + Experience: Missouri
Frequency Distribution of Age + Missouri Experience
"Rule of 80"
9.0
8.0
7.0
Percent
6.0
5.0
4.0
3.0
2.0
1.0
0.0
134
127
125
122
120
118
116
114
112
110
108
106
104
102
100
98
96
94
92
90
88
86
84
82
80
78
76
74
72
70
68
66
64
62
60
58
56
54
52
49
47
Age + MOEXP
80
26
Increment to PV of Pension Wealth from Working an Additional Year:
Missouri
53
54
r = 2.5% S ≤ 30
r = 2.55% S ≥ 31
55
56
57
53
Changed in
July 2001
58
59
60 60
6060
60 60
60
60 60
60 60 60
60 60
60
After 2001
56
54 55
9 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
Before 2001
57
58
59
60 61
62 63
64
age at separation (entry age = 25)
27
Years Experience
at Retirement
30
31
32
Replacement Factor
(after July 2001)
% of Salary
2.50
2.55
2.55
Marginal Gain
in Annuity
% of Salary
2.50
4.05
2.55
28
Distribution of Years of Experience at Retirement
Before and After 2001 Change In Replacement Rate
17.00
16.00
15.00
14.00
13.00
12.00
11.00
1995-2000
2002-2006
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
56
Percent
10.00
29
MOEXP
Retirement Hazard function: Before and After 2001 Enhancement
0.4500
0.4000
0.3500
0.3000
0.2500
0.2000
0.1500
0.1000
0.0500
0.0000
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
Experience
data_9500
data_0206
30
Years Experience
at Retirement
30
31
32
Replacement Factor Marginal Gain
(after July 2001)
in Annuity Distribution of Retirees, %
% of Salary
% of Salary 1995-00 2002-06 change
2.50
2.50
16.00
11.40
-4.60
2.55
4.05
7.60
10.60
3.00
2.55
2.55
4.60
6.00
1.40
31
Unintended Consequences I
• Retiree Health Insurance
– Medicare eligibility at 65
• OPEB/ GASB 43, 45
– Usually unfunded
– Initial estimates very large for some districts/states
– Ohio, combined contribution 24%, STRS requests 5
percent increase
– LAUSD $10b UAL (100 % coverage – teacher and
spouse)
32
2006 GASB 45 Estimates, LAUSD
http://notebook.lausd.net/pls/ptl/docs/PAGE/CA_LAUSD/FLDR_ORGANIZATIONS/COMMITTEE_MAIN/ABT_HOME/ABT_AGENDA/ITEM
%203%20-%20HWACTUARIAL.PDF
33
34
1.
2.
3.
4.
What OPEB’s have been promised?
What is their cost?
NCES survey on (1)
GASB 43, 45 require reporting of (2)
35
Unintended Consequences II
• Retired (Collecting teacher pension)
• Retired and not teaching
• “Double Dipping”
– DROP
– withdrawal
– change pension systems
– part time teaching
• How extensive (???)
36
Structure of SASS Teacher Follow Up Survey
SASS
Teacher
Follow-Up
Survey
2003-04
Current
Teacher
Survey
Former
Teacher
Survey
Collecting Teacher
Pension?
37
Cumulative Distribution of Teacher Retirement Ages:
Teacher Follow Up Surveys, Schools and Staffing Surveys,
2001 and 2005
100
90
58
80
Cumulative Percent
70
60
TFS 2001
TFS 2005
50
40
30
20
10
0
70 or older
69
68
Source: Schools and Staffing Surveys: 2001 & 2005 Teacher Follow Up Survey
67
66
65
64
63
62
61
60
59
58
57
56
55
54
53
52
51
50 or younger
Age
38
Retirement Age in Missouri and the US:
Missouri and SASS Teacher Follow Up Survey 2001.
100.0
90.0
80.0
Cumulative Percent
70.0
60.0
MO
50.0
TFS 2001
40.0
30.0
20.0
10.0
0.0
70 or older
69
68
67
Source: Schools and Staffing Surveys: 2001 & 2005 Teacher Follow Up
Survey
66
65
64
63
62
61
60
59
58
57
56
55
54
53
52
51
50 or younger
Age
39
Retirement Age in Missouri and the US:
Missouri and SASS Teacher Follow Up Survey 2001.
100.0
MO Age Retired
90.0
80.0
MO Age Retired &
Quit
Working
70.0
Cumulative Percent
TFS 2001
60.0
50.0
40.0
30.0
20.0
10.0
0.0
70 or older
69
68
67
66
65
Source: Schools and Staffing Surveys: 2001 & 2005 Teacher Follow Up
64
63
62
61
60
59
58
57
56
55
54
53
52
51
50 or younger
Age
40
Labor Market Experience of Teachers Who Retired in 2000-01:
Percent of Teachers Working Full and Part-Time in Missouri
Public Schools in Subsequent Years
14.0%
12.0%
PT
FT
10.0%
8.0%
8.6%
6.0%
8.7%
8.1%
6.4%
4.0%
2.0%
6.3%
5.0%
4.7%
3.6%
1.0%
1.0%
1.0%
1.0%
1.1%
1.1%
2002
2003
2004
2005
2006
2007
0.0%
2001
41
Structure of 2004-05 SASS Teacher Follow Up Survey
91.6%
SASS
Teacher
Follow-Up
Survey
2003-04
Current
Teacher
Survey
5.3%
(4.9% of total pop.)
Collecting Teacher
Pension?
8.4%
Former
Teacher
Survey
MO 1.2 % of current teachers are collecting pensions
42
What’s Needed
• Facts, facts, facts….
– What’s been promised?
– What are costs?
• What are options?
–
–
–
–
Literature reviews / case studies
Studies of state teacher data
Policy simulations
Transparency
• Regulatory space for experiments
– Pilots & evaluations
– Strategic compensation policy
43
References
• www.caldercenter.org
– Costrell and Podgursky(2007)
– Podgursky and Ehlert (2007)
• www.educationnext.net
– Costrell and Podgursky(2007)
• Ohio report (Fordham foundation)
– http://www.fordhamfoundation.org/institute/pu
blication/publication.cfm?id=371
44