Chad Aldeman recommends "Peaks, cliffs, and valleys: The peculiar incentives of teacher pensions"

Peaks, cliffs, and valleys: The peculiar incentives of teacher pensions

By Robert M. Costrell & Michael Podgursky (Education Next, Winter 2008). www.educationnext.org/peaks-cliffs-and-valleys

Early in my career, I had a warm but hazy perception of teacher pension plans. After all, I knew traditional pension plans shoulder investment risks on behalf of employees and then provide retirees with guaranteed monthly payments. That sounded like a good deal for workers. Sure, I knew pension plans had cost issues, but I figured those were worth the trouble.

But this article by Robert Costrell and Michael Podgursky helped me see the peculiar structures lurking beneath the surface. In Ohio, for example, they found that a typical teacher would need to stay for 25 years to qualify for retirement benefits that were worth more than what had been contributed on their behalf. If they continued teaching, their benefits would increase rapidly until they reached the state’s normal retirement age. After that, their pension wealth would actually start to decline, because every year they continued teaching would be a year they were not collecting a pension.

The authors turned these results into dramatic charts showing the “peaks” and “cliffs” in pension benefits in Ohio, Arkansas, California, and Massachusetts. (Since their original piece came out, I and other researchers have produced similar graphs for many more states).

These graphs helped spur work exploring how well pensions work as an incentive to retain teachers. It turns out that, because the benefits are so back-loaded, they have little effect on the behavior of early- and mid-career teachers, where the majority of turnover happens. Pensions do seem to help retain teachers who are approaching their pension “peak,” but few teachers make it to that point.

Debates about pensions may seem wonky or technical, but Costrell and Podgursky’s article shows why more people should care about the topic, and why we need to get beyond a gauzy understanding of teacher pensions to understand how well they do — and do not — work for teachers.