Golden Handcuffs

Robert M. Costrell and Michael Podgursky
Publication Date: 
Winter 2010

Evidence suggests that current pension systems, by concentrating benefits on teachers who spend their entire careers in a single state and penalizing mobile teachers, may exacerbate the challenge of attracting to teaching young workers, who change jobs and move more often than did previous generations. This paper examines pension formulas in six state plans and measures the redistribution of pension wealth from teachers who separate early to those who separate later. It compares existing defined benefit (DB) teacher pension systems to fiscally equivalent systems that treat all teachers equally and finds that the former often redistribute about half the pension wealth of an entering cohort of teachers to those who separate in their mid-50s from those who leave the system earlier. The paper shows that this back loading produces very large losses in pension wealth for mobile teachers. Compared to a teacher who has worked 30 years in a single state system, a teacher who has put in the same years but split them between two systems will often lose well over one-half of her pension wealth. It is difficult to justify such a system of rewards and penalties on grounds related to fairness or teacher quality.