Better Pay, Fairer Pensions: Reforming Teacher Compensation

When it comes time to pick a career path, young Americans certainly don’t perceive teaching to be the fairest of them all—in any sense of the term. This new report from the Manhattan Institute’s Center for State and Local Leadership emphasizes how pension systems are especially unfair toward young teachers and examines the effects of two cost-neutral pension reforms on teacher compensation for the ten largest U.S. public school districts. The first reform is switching from the traditional defined-benefit (DB) pension system, under which teachers accumulate little retirement wealth until later in their careers, to a “cash-balance” plan, which allows employees to accrue retirement compensation smoothly over their careers. The second reform—the “cost-equivalent” reform—decreases the share of teachers’ salaries devoted to retirement savings so that it matches the private-sector average, moving the difference into take-home salary. The authors concede that traditional DB pension systems do offer teachers the possibility of more retirement money. In most districts, however, that higher amount for a few comes at a cost to a great majority: The loss to teachers who choose to leave the profession after less than three decades exceeds the gains to those who remain. Indeed, the system is constructed on the assumption that many will drop out prior to receiving full benefits. That’s clearly off-putting to smart young folks considering taking up teaching, which means it’s also bad for teacher quality. The report’s recommendations do not address the elephant in the room—namely the huge unfunded pension liabilities that already face most school systems (and their states). But the recommendations are sound and provocative as far as they go. Modeling the teacher-compensation system after private-sector compensation systems is common sensical—and fairer overall.

SOURCE: Josh McGee and Marcus A. Winters, Better Pay, Fairer Pensions: Reforming Teacher Compensation, Center for State and Local Leadership, Civic Report No. 79 (New York, NY: Manhattan Institute for Policy Research, September 2013).

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