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

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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

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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

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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.

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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) )

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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

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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

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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)

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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

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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)

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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)

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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)

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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

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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

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Intended Consequences

• Do pension incentives affect retirement behavior?

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1990-91A + E ≥ 45Full-TimeTeachersN= 31,060

2005-06

21,240Retirements

Missouri Longitudinal Teacher Data File(excluding KC and STL districts)

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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

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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

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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

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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

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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

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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)

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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

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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)

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Unintended Consequences II

• Retired (Collecting teacher pension)

• Retired and not teaching

• “Double Dipping”– DROP– withdrawal– change pension systems– part time teaching

• How extensive (???)

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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

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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

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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

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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

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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

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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

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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