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Could Different Retirement Benefits Result in More Effective Teachers?

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Abstract

We evaluate the chance that changing retirement benefits will lead to greater teacher effectiveness. Changing from defined benefit pensions to defined contribution or cash balance plans would raise initial compensation and effectiveness, while it would increase turnover and thus lower effectiveness. We simulate the effects of higher initial compensation and greater turnover on teacher effectiveness from changing retirement plans and calculate the potential transition costs. There is a 60–70 percent chance that effectiveness would fall if retirement benefits are changed. Transition costs could amount to 0.8 percent of payroll in the third decade after changing retirement benefits.

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Notes

  1. Key examples include Baker and Weisbrot [1999] and SSA [2012] for simulations on Social Security, and CBO [2012] and Gale and Orszag [2002] for simulations on the federal budget.

  2. More studies than we list research the key variables, but we cannot translate many estimates into model parameters. Many salary estimates, for example, only consider lump sum payments or show estimates for teachers in other countries and many turnover estimates show the effects of pension coverage on length of tenure.

  3. We use the prospective unit credit method to calculate normal cost to illustrate additional retirement wealth for teachers in a given year. Public pensions typically use an entry-age normal cost calculation, but this obscures the additional retirement wealth that each cohort of teachers annually earns.

  4. Key examples include Baker and Weisbrot [1999], CBO [2012], Gale and Orszag [2002], and SSA [2012].

  5. Our results do not change materially if we reduce or increase the number of zero observations.

  6. This scenario is equal to cutting benefits even further to raise initial pay since we apply parameter estimates for initial salary to total initial compensation in our estimates of initial effectiveness.

  7. Raising the turnover change for CB plans quickly drops the chance of improving average effectiveness below 50 percent.

  8. DC plan costs are lower than cash balance plan costs because turnover is greater and fewer teachers are vested.

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Authors and Affiliations

  1. Department of Public Policy and Public Affairs, University of Massachusetts Boston, 100 Morrissey Boulevard, Boston, 02125, MA, USA

    Christian E Weller

  2. Center for American Progress, Washington, DC

    Christian E Weller

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  1. Christian E Weller
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Weller, C. Could Different Retirement Benefits Result in More Effective Teachers?. Eastern Econ J 39, 547–563 (2013). https://doi.org/10.1057/eej.2012.21

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