Retirement Benefits Represent Big and Growing Cost for Schools

August 5, 2013

The costs of retiree benefits for educators, including "legacy" costs from unfunded benefits for previous retirees, consume a large and growing share of public spending on K-12 education, say Cory Koedel, an assistant professor of economics, Shawn Ni and Michael Podgursky, professors of economics, at the University of Missouri, Columbia.

  • Between 2004 and 2012, data on fringe benefits from the Bureau of Labor Statistics show that pension costs for public educators rose from 11.9 percent to 16.7 percent of salaries.
  • In contrast, pension costs for professionals in private firms were relatively flat, at about 10 percent of salaries, over the same period.

These gaps are likely to continue to widen as states and school districts attempt to pay down large unfunded liabilities in educators' defined benefit (DB) pension plans.

A largely overlooked factor is that education administrators are enrolled in the same plans as teachers. This is typically not the case in large private-sector firms, where senior managers have their own retirement benefit plans.

Consider:

  • Compared to a senior career teacher, expected lifetime contributions of a principal are 14 percent higher and expected benefits 37 percent higher.
  • For a superintendent, contributions are 53 percent higher, but expected benefits are 89 percent higher than those of a career teacher.

Koedel, Ni and Podgursky explain that the rule structure in educator pension plans, combined with the career-cycle timing of teachers' promotions into administrative positions, results in senior management in K-12 education enjoying the largest net benefits from these plans. With such high personal stakes, there is no reason to expect K-12 administrators or the organizations that represent their interests to support pension reform efforts. Yet it is these administrators who are expected to be the professional voice for the school districts that are bearing the heavy cost of employee pension benefits.

Source: Cory Koedel, Shawn Ni, and Michael Podgursky, "The School Administrator Payoff from Teacher Pensions," Education Next, July 2013.

 

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