Teacher Pension Workshop: Connecting Evidence-Based Research to Pension Reform

Costs and Cross-Subsidies: Reconciling Two Strands of Teacher Pension Analysis

by Andrew G. Biggs

Download eBook for Free

FormatFile SizeNotes
PDF file 0.2 MB

Use Adobe Acrobat Reader version 10 or higher for the best experience.

Retirement plans for public school teachers are the subjects of two strands of recent economic analysis. Market valuation analysis attempts to more accurately value the liabilities of such plans by utilizing a discount rate matched to the nearly-guaranteed nature of teacher pension liabilities, rather than discounting liabilities at the assumed return on a risky portfolio of investments as public plans currently do. The market valuation analysis finds that teacher pensions are more costly to governments and more valuable to teachers than was previously understood. The second strand analyzes cross-subsidies between short-career and long-career teachers, finding that most shorter-career teachers fail to receive benefits equal to their contributions and thus fail to "break even." However, the cross-subsidization analysis fails to incorporate the methodological improvements of the market valuation of pension liabilities. When teacher pension benefits are discounted using a low interest rate to match the low risk of those benefits, teachers of nearly all career lengths at least break even and most teachers fare substantially better than they would under a defined contribution plan. However, this better treatment merely reflects the higher cost and greater generosity of teacher pensions relative to alternate retirement plans.

This search was conducted by RAND Education.

This report is part of the RAND Corporation Working paper series. RAND working papers are intended to share researchers' latest findings and to solicit informal peer review. They have been approved for circulation by RAND but may not have been formally edited or peer reviewed.

This document and trademark(s) contained herein are protected by law. This representation of RAND intellectual property is provided for noncommercial use only. Unauthorized posting of this publication online is prohibited; linking directly to this product page is encouraged. Permission is required from RAND to reproduce, or reuse in another form, any of its research documents for commercial purposes. For information on reprint and reuse permissions, please visit www.rand.org/pubs/permissions.

The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.