Who Benefits from Pension Enhancements?
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. Enhancements included raising cost-of-living adjustments, retroactive bonuses, and adjusting the final-average-salary calculation from the highest five years of earnings to the highest three.
In this report, the authors examine the effects of pension-enhancement legislation for teachers in Missouri. The authors find that enhancements were unevenly distributed, benefitting mainly senior, more experienced teachers, while shortchanging newer teachers. Career teachers in the top percentile saw benefit increases of nearly $100,000 in estimated pension wealth, while the gain for new teachers was just under $4,000 (not including their own funding contributions).
Incorporating funding contributions further diminishes the overall pension package for new teachers. Shortly after pension-enhancement legislation was passed, Missouri began increasing contribution rates for employees by 1 percentage point annually over eight years, for a total increase of 8 percentage points. The authors found that a new teacher would actually have been better off without the pension enhancements because of the contribution rate increases. That is, higher contribution rates offset any gains a new teacher might make from the pension enhancements. Even for a newly entering teacher who stays for an entire career (a very low probability), the teacher’s expected pension wealth is still worse off than if she did not have the benefit enhancement and could pay the lower contribution rate. The new contribution rate increases do not significantly impact teachers who were teaching prior to the benefit enhancements, because they already worked most of their careers without the higher rates.
Who benefits from pension enhancement? According to this analysis of benefit enhancements in Missouri, teachers who stay in one system for an entire career. But this comes at the expense of novice or future teachers.