1. 1 Teacher Pensions, Incentives, and Labor Market Behavior: A Descriptive Analysis Michael Podgursky, University of Missouri - Columbia Robert Costrell, University of Arkansas – Fayetteville Mark Ehlert, University of Missouri- Columbia Center for Analysis of Longitudinal Data in Education Research (CALDER) National Center for Performance Incentives (NCPI) REL Directors Meeting Washington DC Feb. 7, 2008

2. 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. 3 New Vocabulary for Ed Policy and School Finance OPEB’s UAAL PLOP, DROP Present value Discount rates GASB 43,45

4. 4 Recent Reports Promises with A Price: Public Sector Retirement Benefits (Pew Foundation) –http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/State_policy/pension_report.pdfhttp://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.pdfhttp://www.pebc.ca.gov/images/files/final/080107_PEBCReport2007.pdf

5. 5 Fiscal Context: Increasingly Expensive Ohio Teacher Retiree Benefit Costs

6. 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. 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. 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. 9 Annual Pension = S x FAS x r(S,A) S = service years FAS = final average salary r(S,A) = replacement factor When do payments start? (A/S) Typical DB teacher pension

10. 10 Lots of moving parts… Table 1 Key Features of Selected State Defined Benefit Teacher Pension Plans OhioArkansasCaliforniaMassachusettsMissouriFlorida In Social Security NoYesNoYesNo Vesting (years)5551056 Retirement Eligibility Age=60; or Age=55 if Service = 25; or Service = 30 Age = 60; or Service = 25 Age = 55; or Age = 50 if Service = 30 Age = 55; or Service = 20 Age = 60; or Service = 30; or Age + Service = 80 Age=62; or Service=30; or Age<62 and Service<30 w/ 5% reduction in annuity for every year under 62 Contribution RatesDistrict 14% Teacher 10% Employer 14% Teacher 6% District 8.25% Teacher 6%* State, varies Teacher 11% District 11.5% Teacher 11.5% State, varies District 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 total For S < 30 and age < 65, adjustment % applies 2.15% + $900 For S < 28, benefit reduced 5% x (28-S) Linear segments: 1.1% at age 50 1.4% at age 55 2.0% at age 60 2.4% at age 63 For S ≥ 30, add 0.2% to factor, to max of 2.4% Linear: 0.1% at age 41 to 2.5% at age 65 For S ≥ 30, add 2% x (S-24) Max replacement = 80% 2.5%Linear Segments: 1.60% at or before age 62 or 30 years 1.63% at age 63 or 31 years 1.65% at age 64 or 32 years 1.68% at age 65 or 33 years COLA formula3%, 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. 11 Pension Wealth (Annuity) Pension Payment Pension Wealth

12. 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. 13 Age of pension draw Age at separation Ohio, Columbus Teacher Salary Schedule

14. 14 Ohio

15. 15 Addition to pension wealth from an additional year of Teaching (in dollars)

16. 16 Addition to pension wealth from an additional year of Teaching (as % of earnings)

17. 17

18. 18 Increment to PV of Pension Wealth from Working an Additional Year: Missouri

19. 19 Source: Costrell and Podgursky (2007)

20. 20 Source: Costrell and Podgursky (2007)

21. 21 Source: Costrell and Podgursky (2007)

22. 22 Ohio

23. 23

24. 24 Intended Consequences Do pension incentives affect retirement behavior?

25. 25 1990-91 A + E ≥ 45 Full-Time Teachers N= 31,060 2005-06 21,240 Retirements Missouri Longitudinal Teacher Data File (excluding KC and STL districts)

26. 26 80 Distribution of Age + Experience: Missouri

27. 27 Increment to PV of Pension Wealth from Working an Additional Year: Missouri r = 2.5% S ≤ 30 r = 2.55% S ≥ 31 Changed in July 2001

28. 28

29. 29 Distribution of Years of Experience at Retirement Before and After 2001 Change In Replacement Rate

30. 30

31. 31

32. 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. 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. 34

35. 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. 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. 37 Structure of SASS Teacher Follow Up Survey SASS Teacher Follow-Up Survey 2003-04 Current Teacher Survey Former Teacher Survey Collecting Teacher Pension?

38. 38 Cumulative Distribution of Teacher Retirement Ages: Teacher Follow Up Surveys, Schools and Staffing Surveys, 2001 and 2005 58

39. 39 Retirement Age in Missouri and the US: Missouri and SASS Teacher Follow Up Survey 2001.

40. 40 Retirement Age in Missouri and the US: Missouri and SASS Teacher Follow Up Survey 2001.

41. 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

42. 42 Structure of 2004-05 SASS Teacher Follow Up Survey SASS Teacher Follow-Up Survey 2003-04 Current Teacher Survey Former Teacher Survey Collecting Teacher Pension? 5.3% (4.9% of total pop.) 91.6% 8.4% MO 1.2 % of current teachers are collecting pensions

43. 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. 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=371http://www.fordhamfoundation.org/institute/pu blication/publication.cfm?id=371