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1
Teacher Pensions, Incentives, and Labor Market Behavior:A Descriptive Analysis
Michael Podgursky, University of Missouri - ColumbiaRobert Costrell, University of Arkansas – FayettevilleMark Ehlert, University of Missouri- Columbia
Center for Analysis of Longitudinal Data in Education Research (CALDER)National Center for Performance Incentives (NCPI)
REL Directors MeetingWashington DCFeb. 7, 2008
2
Why study teacher retirements?
• Teacher retirements generate vacancies• Teacher retirements generate costs
– Teacher pensions– Retiree health insurance
• Incentives in retirement systems may have significant effects on labor supply and mobility– Pension system incentives are large
• Retirement systems can affect the quantity and quality of the teaching workforce
3
New Vocabulary for Ed Policy and School Finance
• OPEB’s
• UAAL
• PLOP, DROP
• Present value
• Discount rates
• GASB 43,45
4
Recent Reports
• Promises with A Price: Public Sector Retirement Benefits (Pew Foundation)
– http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/State_policy/pension_report.pdf
• Funding Pensions and Retiree Health Care for Public Employees California Public Employee Post-Employment Benefits Commission
– http://www.pebc.ca.gov/images/files/final/080107_PEBCReport2007.pdf
5
Figure 1. Employer and Employee Contributions to STRS
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
1920
1923
1926
1929
1932
1935
1938
1941
1944
1947
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
note: employer contribution includes a contribution to retiree health care fund
per
cen
t o
f sa
lary
employer
employee
increase proposed by STRS
Fiscal Context: Increasingly ExpensiveOhio Teacher Retiree Benefit Costs
6
Research literature• Large labor economics literature on pensions and retirements• Very small literature on teachers
– Furgeson, Strauss, Vogt (2006), PA teachers– Brown (2006), CA teachers– Harris and Adams(2007), CPS
• Absence of basic data – Character of systems (incentives)
• Type of benefits and costs (esp. retiree HI, NCS)• Parameters of systems (NEA and NASRA incomplete, Loeb and Miller,
2006))• Incentive structure of teacher pensions
– Teacher labor market data• HRS (too small for teachers)• SASS TFS• Longitudinal state data (SEA records linked to pension data)
7
Teacher Pensions: Stylized Facts
• Mostly state-wide systems• Roughly 70 percent of teachers are in Social
Security. Generally state decision.• Nearly all teachers are in Defined Benefit (DB)
plans. DC and CB options very limited– DC = Defined Contribution (e.g., IRA)– CB = Cash Balance
• Mean retirement age is well below Social Security and Medicare ages– 58 years (retired and stopped teaching, SASS TFS)
8
Incentives in Teacher Pension Systems
• In public sector DB pension systems accrual of pension wealth is highly non-linear and back-loaded
• State systems generally have sharp “spikes” in accrual rates
– Pull teachers to spike– Push out after
• Not inherent in DB pension systems.– “cash balance” (IBM and other firms)– Can smooth spikes
9
Annual Pension = S x FAS x r(S,A)
S = service yearsFAS = final average salaryr(S,A) = replacement factor
When do payments start? (A/S)
Typical DB teacher pension
10
Lots of moving parts…
Table 1Key Features of Selected State Defined Benefit Teacher Pension Plans
Ohio Arkansas California Massachusetts Missouri Florida
In Social Security
No Yes No Yes No No
Vesting (years) 5 5 5 10 5 6
Retirement Eligibility
Age=60; or Age=55 if Service = 25; or Service = 30
Age = 60; orService = 25
Age = 55; orAge = 50 if Service = 30
Age = 55; orService = 20
Age = 60; orService = 30; orAge + Service = 80
Age=62; or Service=30; or Age<62 and Service<30 w/ 5% reduction in annuity for every year under 62
Contribution Rates District 14%Teacher 10%
Employer 14%Teacher 6%
District 8.25%Teacher 6%*
State, variesTeacher 11%
District 11.5%Teacher 11.5%
State, variesDistrict 8.69%Teacher 0%
Replacement factor (percent per year of service)
Yrs 1-30: 2.2%Yr 31: 2.5%Yr 32: 2.6%, …For S ≥ 35, add 6% to totalFor S < 30 and age < 65, adjustment % applies
2.15% + $900For S < 28, benefit reduced 5% x (28-S)
Linear segments:1.1% at age 501.4% at age 552.0% at age 602.4% at age 63For S ≥ 30, add 0.2% to factor, to max of 2.4%
Linear: 0.1% at age 41 to2.5% at age 65For S ≥ 30, add 2% x (S-24)Max replacement = 80%
2.5% Linear Segments: 1.60% at or before age 62 or 30 years1.63% at age 63 or 31 years1.65% at age 64 or 32 years1.68% at age 65 or 33 years
COLA formula 3%, simple 3%, simple 2%, simple, plus floor of 80% initial purchasing power
CPI to max of 3%, simple,on first $12,000
CPI, compound, up to 1.80 maximum factor
3% Compound
Sources: State pension fund web sites.* An additional 2% contributes to a supplemental defined contribution plan.
11
Pension Wealth(Annuity)
Pension Payment
PensionWealth
12
• Compute pension wealth at each year of work life
• Compute growth of pension wealth from an addition year of work
• Representative teacher– Enters at 25, continuous spell of work– Standard assumptions concerning PV of
pension wealth. (see Costrell and Podgursky (2007) )
13
Figure 3. Pension Wealth, in Inflation-Adjusted Dollarsage of first pension draw indicated
6060606060
60606060606060606060606060
60
55
55
55
55
55
5556
57 5859
60 61 62 63 6465
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
age at separation (entry age = 25) (Assumptions: 2006-2007 Columbus Public Schools Salary Schedule, all cells assumed to grow at 2.5% inflation,
COLA = 3%, interest rate = 5%, unisex 2003 Mortality Table from IRS Revenue Ruling 2002-62 Appendix B.)
adju
sted
fo
r in
flat
ion
, $20
07
Age of pension draw
Age at separation
Ohio, Columbus Teacher Salary Schedule
14
Figure 4. Pension Wealth as Percent of Cumulative Earningsage of first pension draw indicated
60 60 60 6060 60 60 60
60 6060 60 60 606060 60 60 60 60
55
55
55
55
5556
57 5859
6061
62
6364
6555
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
age at separation (entry age = 25) (Assumptions: see Figure 3)
pe
rce
nt
of
cu
mu
lati
ve
ea
rnin
gs
Ohio
15
Figure 5: Annual Deferred Income, in Inflation-Adjusted Dollarsage of first pension draw indicated
65
64
636261
60
59
585756
55
55
55
5555
55
60606060606060606060606060606060606060
$(75,000)
$(50,000)
$(25,000)
$-
$25,000
$50,000
$75,000
$100,000
$125,000
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
age at separation (entry age = 25) (Assumptions: see Figure 3)
adju
sted
fo
r in
flat
ion
, $20
07
Addition to pension wealthfrom an additional year of Teaching (in dollars)
16
Figure 6. Annual deferred income, as % of earningsage of first pension draw indicated
55
64
636261
60
59
585756
55
55
55
55
55
60606060606060606060606060606060606060
-50%
0%
50%
100%
150%
200%
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
age at separation (entry age = 25) (Assumptions: see Figure 3)
pe
rce
nt
of
sa
lary
Addition to pension wealthfrom an additional year of Teaching (as % of earnings)
17
18
Increment to PV of Pension Wealth from Working an Additional Year:Missouri
53
60 60 60 60 60 60 60 60 60 60 60 60 606060
59
58
57
56
55
54
53
54 55
56
57 5859
60 6162 63
64-50%
0%
50%
100%
150%
200%
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
age at separation (entry age = 25)
pe
rce
nt
of
sa
lary
After 2001
Before 2001
19
Figure 2B. Annual deferred income: Arkansasage of first pension draw indicated
60606060606060606060606060606060606060
50
535251
-100%
0%
100%
200%
300%
400%
500%
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
age at separation (entry age = 25)
pe
rce
nt
of
sa
lary
Source: Costrell and Podgursky (2007)
20
Figure 2C. Annual deferred income: Massachusettsage of first pension draw indicated
626160
59
54
585756
55
656463
62
616059585756545454545454545454555555555555555555
55
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
age at separation (entry age = 25)
pe
rce
nt
of
sa
lary
prior to 2001
since 2001
Source: Costrell and Podgursky (2007)
21
Figure 2D. Annual deferred income: Californiaage of first pension draw indicated
62
61
56
5657 58 59
63 64 65
60
5757 57 57 57 57 57 57 57 57 57 57 57 57 57 57 57 57 57
57
57 57 5757 5757
61 62
-50%
0%
50%
100%
150%
200%
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
age at separation (entry age = 25)
pe
rce
nt
of
sa
lary
prior to 1999
since 1999
Source: Costrell and Podgursky (2007)
22
Figure 6. Annual deferred income, as % of earningsage of first pension draw indicated
55
64
636261
60
59
585756
55
55
55
55
55
60606060606060606060606060606060606060
-50%
0%
50%
100%
150%
200%
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
age at separation (entry age = 25) (Assumptions: see Figure 3)
pe
rce
nt
of
sa
lary
Ohio
23
Figure C2. Deferred Income as Percent of Salary: Entry ages 22, 25, 30
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
350%
400%
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
age at separation(Assumptions: see Figure 3)
per
cen
t o
f sa
lary
2225
30
24
Intended Consequences
• Do pension incentives affect retirement behavior?
25
1990-91A + E ≥ 45Full-TimeTeachersN= 31,060
2005-06
21,240Retirements
Missouri Longitudinal Teacher Data File(excluding KC and STL districts)
26
Frequency Distribution of Age + Missouri Experience"Rule of 80"
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
47
49
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
100
102
104
106
108
110
112
114
116
118
120
122
125
127
134
Age + MOEXP
Pe
rce
nt
80
Distribution of Age + Experience: Missouri
27
Increment to PV of Pension Wealth from Working an Additional Year:Missouri
53
60 60 60 60 60 60 60 60 60 60 60 60 606060
59
58
57
56
55
54
53
54 55
56
57 5859
60 6162 63
64-50%
0%
50%
100%
150%
200%
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
age at separation (entry age = 25)
pe
rce
nt
of
sa
lary
After 2001
Before 2001
r = 2.5% S ≤ 30r = 2.55% S ≥ 31
Changed in July 2001
28
Replacement Factor Marginal GainYears Experience (after July 2001) in Annuity
at Retirement % of Salary % of Salary30 2.50 2.5031 2.55 4.0532 2.55 2.55
29
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
14.00
15.00
16.00
17.001 2 3 4 5 6 7 8 9 10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
56
MOEXP
Pe
rce
nt
1995-2000
2002-2006
Distribution of Years of Experience at Retirement Before and After 2001 Change In Replacement Rate
30
Retirement Hazard function: Before and After 2001 Enhancement
0.0000
0.0500
0.1000
0.1500
0.2000
0.2500
0.3000
0.3500
0.4000
0.4500
20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Experience
data_9500 data_0206
31
Replacement Factor Marginal GainYears Experience (after July 2001) in Annuity Distribution of Retirees, %
at Retirement % of Salary % of Salary 1995-00 2002-06 change30 2.50 2.50 16.00 11.40 -4.6031 2.55 4.05 7.60 10.60 3.0032 2.55 2.55 4.60 6.00 1.40
32
Unintended Consequences I
• Retiree Health Insurance– Medicare eligibility at 65
• OPEB/ GASB 43, 45– Usually unfunded– Initial estimates very large for some districts/states– Ohio, combined contribution 24%, STRS requests 5
percent increase– LAUSD $10b UAL (100 % coverage – teacher and
spouse)
33
http://notebook.lausd.net/pls/ptl/docs/PAGE/CA_LAUSD/FLDR_ORGANIZATIONS/COMMITTEE_MAIN/ABT_HOME/ABT_AGENDA/ITEM%203%20-%20HWACTUARIAL.PDF
2006 GASB 45 Estimates, LAUSD
34
35
1. What OPEB’s have been promised?
2. What is their cost?
3. NCES survey on (1)
4. GASB 43, 45 require reporting of (2)
36
Unintended Consequences II
• Retired (Collecting teacher pension)
• Retired and not teaching
• “Double Dipping”– DROP– withdrawal– change pension systems– part time teaching
• How extensive (???)
37
Structure of SASS Teacher Follow Up Survey
SASSTeacherFollow-UpSurvey2003-04
Current TeacherSurvey
Former TeacherSurvey
Collecting Teacher Pension?
38
Cumulative Distribution of Teacher Retirement Ages:Teacher Follow Up Surveys, Schools and Staffing Surveys, 2001 and 2005
0
10
20
30
40
50
60
70
80
90
100
50
or y
ou
ng
er
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
or o
lde
r
Age
Cu
mu
lati
ve
Pe
rce
nt
TFS 2001
TFS 2005
Source: Schools and Staffing Surveys: 2001 & 2005 Teacher Follow Up Survey
58
39
Retirement Age in Missouri and the US:Missouri and SASS Teacher Follow Up Survey 2001.
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
50
or y
ou
ng
er
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
or o
lde
r
Age
Cu
mu
lati
ve
Pe
rce
nt
MO
TFS 2001
Source: Schools and Staffing Surveys: 2001 & 2005 Teacher Follow Up Survey
40
Retirement Age in Missouri and the US:Missouri and SASS Teacher Follow Up Survey 2001.
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
50 or younger
51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 or olderAge
Cu
mu
lati
ve P
erce
nt
MO Age -Retired
MO Age -Retired &QuitWorking
TFS 2001
Source: Schools and Staffing Surveys: 2001 & 2005 Teacher Follow Up
41
Labor Market Experience of Teachers Who Retired in 2000-01:Percent of Teachers Working Full and Part-Time in Missouri Public Schools in Subsequent Years
3.6%
1.0% 1.0% 1.0% 1.0% 1.1% 1.1%
8.6%
8.7%8.1%
6.4% 6.3%
5.0% 4.7%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
2001 2002 2003 2004 2005 2006 2007
PT
FT
42
Structure of 2004-05 SASS Teacher Follow Up Survey
SASSTeacherFollow-UpSurvey2003-04
Current TeacherSurvey
Former TeacherSurvey
Collecting Teacher Pension?
5.3%(4.9% of total pop.)
91.6%
8.4%
MO 1.2 % of current teachers are collecting pensions
43
What’s Needed
• Facts, facts, facts….– What’s been promised?– What are costs?
• What are options?– Literature reviews / case studies– Studies of state teacher data– Policy simulations– Transparency
• Regulatory space for experiments– Pilots & evaluations– Strategic compensation policy
44
References
• www.caldercenter.org– Costrell and Podgursky(2007)– Podgursky and Ehlert (2007)
• www.educationnext.net– Costrell and Podgursky(2007)
• Ohio report (Fordham foundation)– http://www.fordhamfoundation.org/institute/pu
blication/publication.cfm?id=371