In theory, public sector workers like teachers accept lower current salaries in exchange for better benefits like health care and pensions. But a new paper suggests that common perception about how we pay public sector workers is fundamentally flawed.
A new National Bureau of Economic Research paper from Maria Fitzpatrick examines a real-life choice offered to Illinois teachers in the 1990s. The state offered late-career teachers a chance to upgrade their benefit at a very discounted rate. Based on their responses and take-up rates, they actually valued the pension at only about 20 cents on the dollar. In other words, they'd prefer to have $2 in current wages over $10 in pension wealth (adjusted for today's dollars). Taxpayers and employers have to pay the full cost of the benefit, but, because the true costs are hidden, teachers don't value them fully.
This is a bit like a Christmas gift from your Great-Aunt Mildred. She may have spent $50 on a dandy argyle sweater, but you might only think it’s worth $10. (This isn’t just a silly abstract example; economists have documented that this "deadweight loss" actually happens.)
In this metaphor, teacher pensions are like the sweater: Protective and well-intentioned, but ultimately under-valued and under-appreciated. Teachers would rather just have cash, or at least a nice gift card.