How Late-Career Raises Drive Teacher-Pension Debt

Marguerite Roza and Jessica Jonovski
Publication Date: 
December 2014
Teacher pension unfunded liabilities totaled close to $325 billion in 2012. Despite this considerable debt, however, many districts continue to raise later-career teacher salary—an act which can substantially raise a state pension debt. This paper shows the effect of late-career raises on unfunded pension liabilities, with case study examples from California, Illinois, and New Jersey.   
Pension benefits are calculated by multiplying a teacher’s average final salary by total years of service by a benefit multiplier. Because pension benefits are structured around final average salary, any changes to a teacher’s salary will have a direct impact on a teacher’s benefits. Districts typically award teacher raises as a percentage as a salary, leading to substantially higher dollar raises for higher-salaried, late-career teachers, and, subsequently their pension benefits.
These late-career salary raises significantly raise state pension debt. In California, Illinois, and New Jersey, a $1 increase in a late-career teacher salaries increases pension debt by $10 to $16, on average. In Illinois, every $1 awarded in final salary leads to $15.51 in pension obligations. Districts that disproportionately award raises to senior teachers are inadvertently increasing their state’s pension debt.  
The authors make several recommendations: First, the relationship between late-career salary raises and pension costs needs to be clearly communicated before district leaders make salary decisions. Second, decision-making responsibilities related to compensation and pension obligations should be merged so district incentives are aligned with the state. In many instances, districts make salary decisions while a completely separate state agency handles pensions. Third, districts should distribute raises more equitably than the current back-loaded structure, giving more compensation to early-career teachers. In reforming teacher pay scale, districts should also consider giving fixed-dollar raises rather than a percentage increase. Fixed dollar raises would lower pension debt by lowering the final average salary for later-career teachers.