Association for Public Policy Analysis & Management

From funding to teacher quality, inequities exist between school districts. This paper adds to the literature on inequities by examining the impact of pension plan formulas on pension benefits. The purpose is to examine inequities that exist in teacher pensions, especially those that are created by the pension formula itself.  Using data from the salary schedules of 464 Missouri school districts, this paper analyzes how various final average salary calculations would impact the benefits of teachers in different districts.  All of the schools in this analysis belong to Missouri’s Public Employee Retirement System (PSRS), which is a defined-benefit pension plan. A teacher’s benefit in this plan is based on her years of experience and her final average salary, the three highest consecutive years salary.  In addition to computing a three-year FAS figure, the schedules were used to calculate FAS using five, 10, 20, and 30 years.

The current three-year FAS calculation captures salaries when they are most inequitable, at the end of the schedule. Thus, using more years of service in FAS calculations reduces inequity in pension benefits.  To better understand these inequities, districts were broken into quartiles, weighted and unweighted, based on the three-year FAS calculation. The unweighted quartiles consisted of four groups of roughly the same number of districts. These quartiles could be thought of as a district level analysis. A second set of quartiles was generated using the same data, but with weights for the number of full-time equivalent teachers in each district. Thus, the weighted quartiles have roughly the same number of teachers in each group and can be thought of as a teacher-level comparison. Poor districts, particularly small, rural ones tend to have lower salaries than their urban and suburban counterparts. It appears that these disadvantaged districts attempt to keep pace with salaries in other districts at the beginning of the schedule, but quickly fall behind. Undoubtedly, this causes problems in teacher recruitment and retention for poor school districts. To add to the problem, pensions for Missouri teachers are based off of a narrow band of the three years. Not only does this incentivize teachers to leave low paying districts, it exacerbates the inequities that exist in teacher compensation.

            If we assume the total amount of money available for benefits is relatively fixed, the current setup acts as a transfer of wealth from low-paid teachers to high-paid teachers. This occurs for two reason related to the slope and the concavity of a district’s salary schedule. The slope between the starting salary and the FAS tends to be steeper for wealthy districts than for poor districts. Additionally, poor school districts tend to have a more concave schedule than wealthy districts. This results in greater differences between starting and ending salaries in wealthy school districts. When FAS is calculated at the end of the schedule, it does not capture all of this information. As the data show, the choice of the number of years used in FAS calculations impacts the benefits that teachers receive.