Blog: Pensions and Human Capital

Michigan’s retention rates are actually higher than they used to be. Fifteen years ago, even fewer Michigan teachers stayed in the classroom than they do today.

In New York, teachers were subject to mandatory retirement laws that capped the age a teacher could work. Mandatory retirement laws do not exist anymore, but current pension systems do subtly encourage older teachers to retire.

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?

Unfortunately for teachers entering the classroom as a second career, most state pension plans are designed primarily to support the retirement of teachers with much longer time to serve -- leaving second-career teachers with relatively slim benefits.

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.

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.

As Chicago's pension funding is falling, the average teacher retirement benefit is rising. Not only do the retirement benefits come with an expensive price tag, but they're back-loaded for late-career teachers such that only a small percentage of teachers will receive a pension benefit in the first place.

To ensure the accuracy of pension plan assumptions, state retirement systems conduct regular “experience studies” to compare their assumptions with data about the actual numbers observed on the ground. Experience studies help ensure the accuracy of a plan by measuring any fluctuations in the field and proposing subsequent adjustments to plan assumptions. We unearthed over two decades worth of experience studies from North Dakota.

Two simple graphs show show that current teachers in Kansas City and St. Louis are poorly served by their defined benefit pension plans.