Let’s say you are running a school district. Would you raise teacher compensation (salaries and retirement benefits) by 5-8 percent for all of those who stay less than 20 years in exchange for lowering compensation by up to 3.4 percent for 38-year veterans?
This is essentially the question posed in a new Manhattan Institute report by Josh McGee and Marcus Winters. McGee and Winters look at the potential implications for the 10 largest school districts in the country if they were to adopt two reforms:
- Jettison their current approach to retirement benefits in which teachers accrue relatively meager benefits through much of their careers, and then abruptly become eligible for much more as they near retirement age. In its place, districts should adopt retirement systems where benefits accrue smoothly, year after year, without sudden, arbitrary jumps late in a teacher’s working life.
- Increase the amount of teacher compensation that is paid directly as salary, and reduce the amount of compensation that is devoted to retirement benefits in order to match the norm for similarly situated workers in the private sector.
The chart below maps out how these two cost-neutral reforms would play out for teachers in New York City who begin teaching at age 25. (I’ve added “Winners” and “Losers” to show which teachers would benefit from the changes.) If teachers stayed three years, they would earn about 8 percent more. If they stayed 20 years, they would be 5 percent better off. If they taught 30 years? Still better off. Only if they retired between 31 and 44 years of teaching would teachers lose out from the reforms and, at most, if they taught exactly 38 years, they would be 3.4 percent poorer. Unlike the current system, which features large financial incentives for teachers to retire precisely at a pre-determined age (New York City teachers who begin at age 25 currently hit peak pension wealth at age 63), the new system would offer teachers a smooth wealth accrual that would allow them to time their retirement decisions as they saw fit.
Percent Difference in Cumulative Total Compensation
The chart doesn’t suggest it visually, but it’s important to remember that teachers do not often stay in the profession or in the same school district for 30+ years. Nearly half of all teachers nationwide leave the profession before the end of their fifth year. A similar story plays out in New York City as well, where the majority of teachers leave well before their full pension benefits kick in. In other words, not only are the potential gains from McGee and Winters’ pension reforms bigger than the potential losses, but the percentage of teachers who could benefit from changes like these would far exceed the percentage of teachers who would potentially lose out.
As the authors make clear, the current defined benefit pension systems in place across the country do offer a higher maximum level of compensation for the minority of teachers who stay in the profession and remain in the same pension system for their entire careers. But the majority of teachers stand to significantly benefit from these two cost-neutral pension reforms. Read the full report here.
This blog entry first appeared on The Quick and the Ed.
In April there was a dust-up in the finance and education worlds when the American Federation of Teachers called out Dan Loeb, founder and CEO of a hedge fund, for simultaneously investing teacher pension fund assets while serving on the board of StudentsFirst’s chapter in New York, which advocates for pension reform, and advocating reform of teacher pensions himself. The whole episode was part of an enemies list exercise (pdf) by the AFT to put money mangers on notice if they deviated from the union’s line on pension reform. And it was, of course, easy fodder for one dimensional takes.
But as is often the case the reality was more complicated. For starters, because of multiple issues including irresponsible decisions by state legislators and unsustainable benefit schemes demanded by public employee unions (yes there is plenty of blame to go around) there is an enormous problem with financing pensions (pdf). But, for the most part, so far reforms have come at the expense of teachers, generally new teachers, rather than comprehensive efforts to reform how we finance retirement for educators. We need a richer conversation about how to simultaneously address the fiscal problems and modernize teacher retirement for today’s more mobile labor market. The choice facing policymakers is less a binary one between defined benefit pensions (those that pay participants a pre-defined benefit) and defined contribution plans (401k-style plans that provide benefits based on contributions and investment choices/performance) than it is about a subset of choices about employer and employee contributions, risk allocation, vesting rules, and issues like portability for participants. In some states Social Security participation is also an issue.
A second wrinkle illustrates how motivations and views on what good public policy looks like are about more than raw self-interest. While you don’t want to overstate it because there are many sources of aggregated risk capital besides teacher pensions, for a hedge fund manager like Loeb to argue for a shift toward retirement systems where individuals control their retirement investments is to some extent arguing against their own self-interest as professional investors dependent on institutional funds for risk capital.
That’s because hedge funds and private equity are closely tied to large institutional investors like pensions. Pension funds are frequently limited partners on various deals and chase profit like any other investor – it’s why we episodically get embarrassing stories about how a teacher pension fund invested in for-profit school management or more recently gun manufacturers. ”Pension fund allocations have been major source of growth in assets to hedge funds and private equity over the last 10 years. Used to be primarily high net worth and endowments” one longtime investment manager told me. In other words, pension funds are a significant part of the fuel for private equity and hedge funds.
“Conceptually, at least, [investment managers who call for reform of teacher pensions] are putting their education reform agenda ahead of business interests. Teacher pension funds are a significant source of funding,” said an industry insider who advises private equity firms on deals. He, and others, however, were quick to point out that private equity and hedge funds will continue to make money even if pensions were to vanish tomorrow. And in practice there will be plenty of pension money for a long time even if if all states were to put all new teachers in defined contribution plans this year (meanwhile 401K plans could change rules about allowable investments to include illiquid investments like private equity or hedge funds).
But the bottom line remains: Pension funds are an available source of revenue and risk capital and a popular one for hedge funds and private equity. They’re joined at the hip. That’s why rather than a story of simple motivations it’s a good reminder that while education issues are usually presented in black and white and heroes and villains, they’re rarely that simple.
Update: One long time money manger writes to say, “I think the point that is the most interesting here, but has not been well articulated publicly is that the unions are pretending like this is their money to do with as they please to meet their social engineering when in fact it is taxpayer money, not theirs. If unions are willing to risk lower benefits to their members by accepting the harms of lower plan performance that could result from neglecting their fiduciary duty obligations, then fine they could do what they want. But when instead they are saying we want our pension benefits guaranteed, we want to use the pension capital to pursue our social/political goals, and then we want to raise taxes to make up for any shortfall there is something really wrong.”
This blog entry first appeared on Eduwonk.com.
Taxonomy:The big news out of the latest Public Education Finances Report is official confirmation that school districts spent less money per student in 2010-11 than they had the year before, the first one-year decline in nearly four decades. It’s worth taking some time to reflect on that fact, but the full report is also a valuable source of data on state and district revenues and expenditures and the entirety of the $600 billion public K-12 education industry. One key takeaway is that employee benefits continue to take on a rising share of district expenditures.
The table below uses 19 years of data (all years that are available online) to show total current expenditures (i.e. it excludes capital costs and debt), expenditures on base salaries and wages, and expenditures on benefits like retirement coverage, health insurance, tuition reimbursements, and unemployment compensation. Although it would be interesting to sort out which of these benefits have increased the most, the data don’t allow us to draw those granular conclusions. But they do tell us that teachers and district employees are forgoing wage increases on behalf of benefit enhancements.
From 2001 to 2011 alone, public education spending increased 49 percent, but, while salaries and wages increased 37 percent, employee benefits increased 88 percent. Twenty years ago, districts spent more than four dollars in wages to every one dollar they spent on benefits. Now that ratio has dropped under three-to-one. Benefits now eat up more than 20 percent of district budgets, or $2,262 per student, and those numbers are climbing.
This trend coincided roughly with a teacher hiring boom here in the United States, meaning these changes happened despite districts’ employing more teachers, and it’s likely to continue as states and districts continue to feel the pressure from unfunded pension and health care promises, which totaled $1.38 trillion at last count. This is not a good trend. Instead of hiring even more teachers or paying them more money, districts are devoting an increasing share of finite resources to employee benefits. Workers value compensation that shows up in their paychecks more than they do hidden benefits, and districts should make conscious efforts to slow this change and put more money directly into teachers’ pockets.
This blog entry first appeared on The Quick and the Ed.
Taxonomy:Conventional wisdom says that public sector pensions are far too optimistic in assuming an 8-percent investment return. Indeed, the stock market has far underperformed that goal lately, leaving pension plans in precarious financial shape.
But, if we expand our time frame to a longer horizon of, say, 25 years, it turns out that conventional wisdom is false. Using actual investment return results from state pension plans as of the end of 2012, the National Association of State Retirement Administrators found that median investment returns actually exceeded state targets over longer time periods:
5 years: 2.9 percent
10 years: 7.5 percent
20 years: 7.9 percent
25 years: 8.9 percent
This 25-year period included the bull market of the 1990s, one of the longest economic expansions in modern history, but it also included the subsequent crash, the disappointing 2000s, and the Great Recession of 2007-09. It wasn’t a “typical” 25-year period, but no 25-year period is typical. In fact, if you look at the performance of a balanced investment portfolio over long time horizons, it almost always beats state investment assumptions. As is often repeated, past performance is no guarantee of future results, but we shouldn’t ignore it, either. It’s tempting to focus on how bad the last five years have been, but it would be odd to argue that we should pay attention to only very recent history while disregarding the longer perspective.
So why are state pension plans in such poor financial shape today? There are two main reasons. One is that at the end of the 1990s, when state pension plans looked like they were in great shape, many states adopted benefit enhancements. State legislators looked at well-funded retirement plans, buoyed by an amazing stock market run, and decided they could support higher benefit payments. They couldn’t. Inevitably, short-term thinking put them in trouble today.
Second, the plans suffer from tremendous volatility. Investment returns now contribute about two-thirds of a pension plan’s earnings in a given year. When they turn negative during an economic crash, plan funding falls precipitously. But looking at a state pension plan after a recession and declaring it financially insolvent is no different than spendthrift state legislators expanding benefits at the end of the 1990s. They’re both driven by short-term thinking.
This second point is important, because there’s a difference between short-term volatility and long-term investment return assumptions. As the data show, the former is a real problem while the latter is not. States could begin to address the volatility problem by taking some easy first steps. For example, instead of setting one investment assumption, they could acknowledge their pension savings are susceptible to market swings by making high and low projections. During flush years, they should hesitate from making hasty benefit enhancements or temporarily pausing state or employer contributions.
This blog entry first appeared on The Quick and the Ed.
Taxonomy:The research field of teacher pensions has been a relative backwater, but lately it just keeps getting more interesting. Yesterday, the Fordham Institute released a new paper from Marty West and Matt Chingos analyzing a 2002 policy change in Florida which allowed teachers to choose between a traditional defined benefit pension plan and a 401k-style defined contribution plan. The authors were able to track who chose which plan, what subject they taught, how effective they were in the classroom, how long they remained teaching, and whether the pension plan’s structure had any effect on retention.
Perhaps not surprisingly, they found that math and science teachers, teachers with advanced degrees, and charter school teachers were all more likely to opt for the portable defined contribution plan. These teachers may enter the profession not planning to stay for long or, in the case of charters, may anticipate switching to another school that’s not enrolled in the Florida defined benefit system (Florida charters have a choice on whether to participate or not).
Important, they did not find any differences in effectiveness between those who chose the defined benefit plan and those who chose the defined contribution plan, but they did find differences in attrition rates. Teachers who opted into the defined contribution plan were one percentage point more likely to leave before their second year and nine percentage points more likely to leave after their fifth year. This will give fodder to the crowd that claims that defined benefit plans do a better job of retaining employees than 401k-style defined contribution plans and support those seeking to preserve the status quo in most other states.
But wait, there’s more to this story. If you care at all about the thousands of teachers who will one day become ex-teachers, this paper puts numbers on just how many there are and how much money they’re losing. In the seven years of the study, Florida districts hired 92,000 first-time teachers. The authors found that roughly 40 percent of these beginning teachers stay less than six years, the amount of time Florida required a teacher to be employed before becoming eligible for pension benefits. By not meeting the vesting requirement, the authors estimate each of those ex-teachers will lose out on retirement savings of up to $27,784 in today’s dollars.
It was outside the scope of the study, but Florida recently lengthened the vesting period from six to eight years, meaning even more teachers are likely to become ex-teachers before qualifying for pension benefits, leaving even more money on the table. (See how Florida’s vesting requirements compare to other states here.)
This research is part of a new wave of pension research linking pension policies to what actually happens in schools. Last November, CALDER released a paper exploiting a similar policy change in Washington state. It gave teachers a choice between a traditional defined benefit plan and a hybrid plan that combined a less-generous defined benefit with a defined contribution component. But unlike Chingos and West, they found t teachers who chose the hybrid plan out-performed teachers who chose the defined benefit only by about 2 to 3 percent of a standard deviation, an effect that would be similar in magnitude to the difference between a beginning teacher and a teacher with one to two years of experience. And last month I wrote about a new paper studying an early retirement plan in Illinois that led to huge numbers of older, more experienced teachers retiring but which resulted in no academic harm. When average teacher experience declined rapidly, we would have expected student achievement to go down. Instead, despite an influx of novice teachers, student math and English test scores either stayed the same or went up.
This is about as exciting as the pension world gets.
This blog entry first appeared on The Quick and the Ed.
According to important new research, teacher pensions—both how generous they are and how they are structured—have important effects on the quality of the teaching workforce. This research provides some insight into how the looming retirement of the Baby Boom generation may affect students.
Last week the Center for Retirement Research released a research brief looking at whether teacher salaries and teacher pensions affect the quality of new teacher hires, measured by SAT scores. Even after controlling for things like the poverty level of the school, minority enrollment, gender, and location of the teacher’s preparation program, it found that teachers from more highly selective institutions sought out teaching jobs with higher compensation. Teachers preferred both higher salaries and higher retirement spending, which is somewhat surprising given that retirement costs are often assumed to be opaque to employees, especially younger ones who won’t be thinking of retirement for many years.
In the mid-1990s, Illinois offered an early retirement incentive which allowed employees to purchase extra years of creditable service for calculating their retirement benefit. Over a two-year period, Illinois lost 10 percent of its teachers, most of whom were experienced teachers, as the early retirement incentive led to a threefold increase in the retirement of experienced teachers in the 1994 and 1995 school years. Across the state, average teacher experience declined and the number of new teachers increased substantially.
In Education Week, Sarah Sparks covered a new study looking at the Illinois early retirement program. In a nutshell, even though the “5+5”program led to huge numbers of older, more experienced teachers retiring, it did no harm academically. In fact, student achievement may have gone up.
All else equal, and since we know that teacher effectiveness rises with experience, we would have expected student achievement to go down. Yet, despite the influx of novice teachers, student math and English test scores either stayed the same or went up. Importantly, those results held true for low-income, minority, and low-achieving students as well.
This blog entry first appeared on The Quick and the Ed.
