Indiana University SPEA Edward J. Bloustein School of Planning and Public Policy University of Pennsylvania AIR American University

Panel Paper: Examining Inequities in Teacher Pension Wealth

Friday, November 13, 2015 : 9:10 AM
Pearson II (Hyatt Regency Miami)

*Names in bold indicate Presenter

James Shuls, University of Missouri, St. Louis
Much has been made about the features imbedded in defined-benefit pension systems for teachers. These retirement plans pull individuals to a predetermined retirement age and then push them out afterwards due to a sudden spike and then a sharp decline in pension wealth. These systems also transfer pension wealth from individuals who retire early to individuals who remain in the system until full-retirement. These features are possible in defined-benefit plans because contributions are not tied to pension wealth. Instead, pension wealth is computed based on a formula that takes into account years of service and final average salary. To date, no one has examined how the slope of teacher salary schedules can result in the transfer of pension wealth from teachers in one school to teachers in another. In this paper, the salary schedules of Missouri’s 500+ school districts are used to do just that.
In Missouri, final average salary is the highest average from three consecutive years. This is typically a teacher’s last three years prior to retirement. There are significant differences in final average salaries between districts. Some of the differences are caused because some districts simply pay more at every step on the salary schedule. Other differences, however, come from the structure of the salary schedule. It is possible for two teachers to contribute the same amount to the pension system, but finish their career with different final average salaries because of the shape of their salary schedule.
Using salary schedules from each district, I calculate the net present value of a teacher’s pension. Using the state’s standard contribution rate of 29 percent (14.4 percent from the individual and the school district) I estimate how much teachers in each school district will contribute to the retirement system over the course of their career. These figures, net present value of the contributions and the benefits, allow me to see which districts are getting disproportionately more or less from their pension due to the shape of their salary schedule. In other words, I can examine the transfer of wealth from some schools. This typically occurs when a district has relatively high salaries early in a teacher’s career, but flattens the schedule or freezes a teacher’s pay toward the end of her career.
Using descriptive data, provided by the Missouri Department of Elementary and Secondary Education, I examine how observable characteristics, such as the percent of students receiving free or reduced price lunches, percent minority students, and assessed property value per-pupil, among others, relate to the shape of a district’s salary schedule. Early estimates indicate that poorer school districts tend to flatten their salary schedule at the end of a teacher’s career. This means teachers in poor school districts tend to get disproportionately less than teachers in wealthier school districts. In other words, there is a transfer of pension wealth from teachers in poor school districts to teachers in wealthier school districts.