Rethinking teacher retirement plans

04/06/2014 5:26 PM

04/06/2014 5:26 PM

Imagine a technology firm that wanted to move a talented IT professional from an office in Independence to Kansas City.

You wouldn’t expect that IT professional to lose several hundred thousand dollars in pension wealth because she made the move. Indeed, in the face of such a large penalty, few professionals would move and productivity in that firm, and the economy as a whole, would suffer.

Now enter the world of public K-12 education. In a Kauffman Foundation-sponsored study of the Missouri teacher pension system, we found that if Kansas City Public Schools wants to recruit a talented school leader from a suburban district to take over a struggling school, or an innovative charter school like KIPP wants to move a staff member from a KIPP school in St. Louis to one in Kansas City, the professional educator will incur a penalty that can be in the hundreds of thousands of dollars.

The source of the mobility penalty lies in the balkanized structure of educator pension plans.

Teachers and principals in Kansas City Public Schools have their own plan. Educators on the Kansas side of the state line are in a different plan. Educators in the St. Louis school district have their own plan, and the rest of Missouri teachers, including those in the KC area, are in yet another.

There is no reciprocity between these plans, so the value of a teacher’s pension is frozen once she leaves any of the plans.

Employer contributions, which represent half or more of contributions, cannot be withdrawn when she leaves, in contrast to the typical private sector plan where both worker and employer contributions move with the employee.

The penalties associated with crossing pension boundaries act like a tariff on the import of human capital into Kansas City Public Schools.

They can have large consequences for Kansas City students and schools because research consistently identifies teacher quality as one of the most important determinants of school effectiveness.

These mobility penalties arise because retirement benefits in educator plans do not accrue smoothly over a work career as they do in a 401k-type plan (or TIAA-CREF for many college professors).

Rather, they are heavily concentrated in the years just preceding retirement (a phenomenon described as “back-loading”). These types of retirement plans are designed to lock mid-career employees in and punish mobility — and they do so very effectively.

These back-loaded benefits make such plans an exceptionally bad deal for the typical new teacher in a Kansas City charter or district school.

The estimated probability that a newly hired teacher in a Kansas City Public Schools district or charter school will remain in the plan long enough to qualify for a regular pension is very small — less than five percent.

This is important because the current pension system is absorbing a large and growing share of revenues that could otherwise be used to improve salaries for beginning teachers.

These balkanized pension plans deter movement of educator talent to its best use, provide virtually no benefits for the typical new teacher recruited into a Kansas City public school, and are absorbing a larger and larger share of school revenues.

It’s time to ask whether there are better ways to spend these education dollars.

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