Blog: Mobility and Portability

Many teachers get worse benefits than those offered in the private sector.
States have attempted to ameliorate the non-portability of pensions by “selling” service credit. Unfortunately, though, pension plans exact transaction costs on mobile teachers that significantly hamper their savings.
School administrators should warn all new teachers about the significant savings penalty they face because of high mobility rates and long service requirements to qualify for a pension.
When a teacher leaves the classroom, she may also leave the state or district retirement system. As a teacher leaves, what happens to her pension contributions?

In the late 1990s, state pension funds experienced surpluses from high returns in the stock market. Rather than prudently saving the surplus funds, many states passed legislation to enhance or increase pension benefits for public workers. 

In a recent paper, economists Cory Koedel, Shawn Ni, and Michael Podgursky analyzed who benefitted from a series of pension enhancements in Missouri in the late 1990s and early 2000s and by how much. As the authors calculate, teachers who were already well into their teaching career received benefit increases of over $100,000 in estimated pension wealth. However, to pay for the benefit enhancements and a falling stock market, Missouri has been forced to increase teacher contributions to the pension plan. That contribution increase was not enough to cancel out the benefit increase for late-career teachers, but it erased all gains for teachers who were early in their career at the time. Most importantly, because both employees and their employers were now paying higher contribution rates, it made the overall compensation structure much worse for all new teachers. That system still exists today. 

You should read the full paper, but to show the effect of the benefit enhancements for mid- and late-career teachers I created the gif below from the authors' Figure 1. It shows the changes in pension wealth for someone who began teaching in Missouri schools at the age of 25 in 1983. Her benefits improved substantially as a result of pension formula enhancements in 1996, 1999, 2000, and 2002, creating a much more generous benefit at the back end of her career. The dotted line in all the graphs is the baseline year of 1995. 

Chart: Missouri Pension Wealth Accrual Before and After Benefit Enhancements, 1995-2002

Missouri Pension Enhancements on Make A Gif

Source: Figure 1 here

 

States may be getting a deal for their teachers. Among other trends, the teaching force is simultaneously becoming younger and less experienced. This translates to cheaper costs for the state, but at the price of teacher retirement security.
Our schools are dealing with a lot more new teachers than they had in the past, and defined benefit pension systems aren’t set up to deal with this type of mobile workforce. What's causing the rise in mobility?
Pensions provide us with more than just financial data. Pensions also provide us with key information about teacher retention, reaching back for decades. In New York City, teachers do not remain in the profession as long as they did in the past. Instead of responding to this trend, the New York City teacher pension plan has become less generous to mobile teachers.
Last week we presented our new paper, Friends without Benefits: How States Systematically Shortchange Teachers' Retirement and Threaten Their Retirement Security, at the 39th annual conference of the Association of Education Finance and Policy (AEFP).
Just as teachers in Missouri cannot move between pension boundaries without incurring a financial penalty, teachers cannot move across state pension boundaries without incurring similar costs. This acts like a tariff that restricts the movement of human capital between pension systems.