When teachers choose pension plans

By Chester E. Finn, Jr. and Amber M. Winkler / February 21, 2013

That the arcane issue of teacher pensions has turned into an emotional battleground can be evinced by recent headlines:

“Cuomo Pension Plan Sparks Fight With New York Unions” (March 14, 2012, Huffington Post)

“Don’t demonize teachers because of pension system’s faults” (October 21, 2012, Los Angeles Times)

“Pension reform could hit oldest retired teachers the hardest” (February 3, 2013, Chicago Tribune)

New teachers should have the opportunity to select their own pension plan. Photo by kenteegardin

In an era of budgetary belt tightening, state and local policymakers are finally awakening to the impact of teacher-pension costs on their bottom lines. Recent reports demonstrate that such pension systems across the United States are burdened by at least $390 billion in unfunded liabilities. Yet most states and municipalities have been taking the road of least resistance, tinkering around the edges rather than tackling comprehensive (but painful) pension reform.

Many have suggested that one solution to the pension crisis is to offer teachers the option of a 401(k)-style plan (also known as a “defined contribution” or DC plan) in lieu of a traditional pension (known as a “defined benefit” or DB plan). There is merit in that approach, but would this alternative appeal to teachers? Would certain types of teachers—new, veteran, more educated, and so on—naturally gravitate to one type of retirement plan over another? Might it be the case that more (or less) effective teachers or teachers in harder-to staff subjects would prefer DC plans due to their portability or other advantages (real or perceived)?

To investigate these possibilities, Martin West, a professor at the Harvard Graduate School of Education, and Matthew Chingos, a fellow at the Brookings Institution’s Brown Center on Education Policy, looked at these questions in Florida—one of just two states that allow teachers to choose between DB and DC plans. (South Carolina is the other.)

They found that a nontrivial fraction—a quarter to a third—of new Florida teachers opted for the DC plan, despite the fact that the DB plan was the default. Teachers with more career options—notably, individuals with advanced degrees or math and science specialties—and charter school teachers are more likely to favor the DC plan. On the other hand, minority teachers (both black and Hispanic) tend to favor DB plans.

Only a weak relationship between teachers’ value added (to student achievement) and their choice of pension plans was found, with teachers in the bottom 25 percent slightly less likely to choose the DC option. West and Chingos also found no difference in the relationship between teacher effectiveness and attrition for both the DB and DC groups.

The authors noted that many short-timers are using the DC option to leave with something rather than nothing (a smart choice!). But DB teachers who left at five years of teaching forfeited roughly three-quarters of a year’s salary. That’s undeniably good for the solvency of the pension fund, but bad for the affected teachers.

Affording new teachers the opportunity to select their own pension plan is only a beginning—and not necessarily a money saver. But it’s also a way to tackle another of the nation’s painful public-policy challenges: attracting people into our classrooms who will teach our children well in all the subjects those youngsters need to learn, while shaping their own careers in ways that offer them the kinds of options that other professionals enjoy in twenty-first-century America. With upwards of a third of new teachers voting with their feet for 401(k) options, every state in the union should make such choices available, too.