Chicago’s current pension crisis may have been a long time coming. It’s a “dark cloud that’s coming ever closer,” as Chicago Mayor Rahm Emanuel recently described it. The city’s substantial credit-rating downgrade, on the heels of Detroit’s bankruptcy filing, suggest that the pension storm is making landfall. One often overlooked reason for the large size of state pension obligations is the fact that school administrators — aka management — have a lot to gain from generous teacher pension plans.
When my colleagues Shawn Ni and Cory Koedel and I took a close look at teacher pensions in Missouri — which are determined by rules similar to those in pension plans across the country — we found that school administrators (superintendents and principals, who participate in teacher pension plans) reap much larger benefits from the plans than teachers do.
Because they earn more than teachers, school principals can expect to contribute 14 percent more to the pension plan than a senior teacher would contribute over the course of a career. A school superintendent can expect to contribute 53 percent more. However, when it comes to benefits, the principal can expect to receive 37 percent more than the senior teacher, and the superintendent 89 percent more.
What explains this gap? Why are the administrator benefits so much larger than contributions? It turns out that this is the natural result of the most common type of teacher pension plan, known as final average salary defined-benefit plans. In a final average salary plan, your retirement check is based not on your career average salary, but rather, on the average of several years of your highest salary (typically earned in your final years). Since school administrators work for many years as a teacher and then receive a substantial boost in pay at the back end of a career as they move into administration, they fare much better than a senior teacher.
Of course, the ones who fare worst of all are novice teachers. On entry, a new teacher can expect to contribute 30 percent of what a senior teacher does, but can only expect 18 percent of the benefits. This is the same math as seen in the administrator example, but in reverse. For a new teacher, the contributions to a pension plan are front-loaded, but the benefits are far in the future. For teachers who quit early in a career, these benefits are rarely collected.
Defined-benefit pension plans don’t have to work this way. For example, Social Security is a defined-benefit pension plan. However, unlike the typical teacher pension, your Social Security retirement check is based on 35 years of earnings, not the highest two or three years. It would be possible to design defined-benefit plans for educators in which retirement checks would reflect career average earnings. A “cash balance” defined-benefit plan would have this feature, and as a result, would not penalize teachers who move from one state to another during a teaching career.
Given that administrators are the largest net beneficiaries of the current teacher pension system, it should come as no surprise that they are not at the barricades clamoring for change to these programs. On the issue of pension reform, labor and management are likely to be on the same side of the bargaining table.
This is unfortunate given the fact that the costs of current pension plans are a huge source of fiscal stress in many states, and that a more modern, mobile and cheaper retirement benefit plan could better help public schools compete for academically talented, young and mobile college graduates.
Michael Podgursky is professor of economics at the University of Missouri at Columbia.