Hostname: page-component-8448b6f56d-wq2xx Total loading time: 0 Render date: 2024-04-24T12:18:04.269Z Has data issue: false hasContentIssue false
  • English
  • Français

Cross-subsidization of teacher pension benefits: the impact of the discount rate

Published online by Cambridge University Press:  05 November 2018

Robert M. Costrell
Robert M. Costrell*
Affiliation:
Department of Education Reform, University of Arkansas, Fayetteville, AR72701, USA
*
*Corresponding author. E-mail: costrell@uark.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper builds on previous work (Costrell and McGee, 2017a, Education Finance and Policy) on the redistribution of teacher pension benefits, as measured by the wide variation in individual normal cost rates by age of entry and exit, and the associated cross-subsidies. The further steps taken here are: (i) to examine the impact of the discount rate on the degree of redistribution, and the analytics behind it; and (ii) to identify the distribution of the market value of the pension guarantee. Using the example of the California State Teachers’ Retirement System, I find that: (i) high-assumed returns substantially understate the extent to which costs are redistributed for back-loaded plans; and (ii) the market value of the pension guarantee is highly concentrated among long-term teachers.

Keywords

Cross-subsidiespublic pensionsteachers

JEL classification

H75: State and Local Government: Health • Education • Welfare • Public Pensions I22: Educational Finance • Financial Aid
Type
Article
Information
Journal of Pension Economics & Finance , Volume 19 , Issue 2 , April 2020 , pp. 147 - 162
Copyright
Copyright © Cambridge University Press 2018

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aldeman, C and Johnson, RW (2015) Negative Returns: How State Pensions Shortchange Teachers, Bellwether Education Partners and Urban Institute.Google Scholar
Backes, B, Goldhaber, D, Grout, C, Koedel, C, Ni, S, Podgursky, M, Xiang, PB and Xu, Z (2016) Benefit or burden? On the intergenerational inequity of teacher pension plans. Educational Researcher 45, 367–377.CrossRefGoogle Scholar
Biggs, AG (2011) An options pricing method for calculating the market price of public sector pension liabilities. Public Budgeting & Finance 31, 94–118.CrossRefGoogle Scholar
Biggs, AG (2018) Costs and cross-subsidies: reconciling two strands of teacher pension analysis. RAND Education, Working Paper 1234.Google Scholar
Boyd, D and Yin, Y (2018) Investment risk and its potential consequences for teacher retirement systems and school districts. RAND Education, Working Paper 1250.Google Scholar
Brown, J and Wilcox, D (2009) Discounting state and local pension liabilities. American Economic Review 99, 538–542.CrossRefGoogle Scholar
California State Teachers’ Retirement System (2016) Experience Analysis, July 1, 2010–June 30, 2015, Milliman, December 30.Google Scholar
California State Teachers’ Retirement System (2018 a) Defined Benefit Actuarial Valuation as of June 30, 2017, Milliman, April 9.Google Scholar
California State Teachers’ Retirement System (2018 b) Member Handbook, Sacramento, CA.Google Scholar
Center for Retirement Research (2018) Public Plans Database: National Data, Boston College.Google Scholar
Costrell, RM (2018 a) Accounting for the rise in unfunded public pension liabilities: faulty counterfactuals and the allure of simple gain/loss summations. Journal of Pension Economics and Finance 17, 23–45.CrossRefGoogle Scholar
Costrell, RM (2018 b) The 80 percent pension funding target, high assumed returns, and generational inequity. Contemporary Economic Policy 36, 493–504.CrossRefGoogle Scholar
Costrell, RM (2018 c) Policy Brief. Distribution of Teacher Pension Benefits in California: A Vast System of Cross-Subsidies, University of Arkansas, January 15.Google Scholar
Costrell, RM (2018 d) Cross-Subsidization of Teacher Pension Costs: The Impact of the Discount Rate, University of Arkansas, February 27.CrossRefGoogle Scholar
Costrell, RM (2018 e) Arkansas Teacher Retirement Plan: Risks, Redistribution and Remedies, Testimony to Arkansas Legislature, Joint Committee on Public Retirement, September 11.Google Scholar
Costrell, RM and Fuchsman, D (2018) Policy Brief. Distribution of Teacher Pension Benefits in Massachusetts: An Idiosyncratic System of Cross-Subsidies, University of Arkansas, February 8.Google Scholar
Costrell, RM and McGee, J (2017 a) Cross-subsidization of teacher pension costs: the case of California. Education Finance and Policy forthcoming. Posted online, 16 November, 2017.Google Scholar
Costrell, RM and McGee, J (2017 b) Cross-subsidization of teacher pension costs: the impact of assumed market returns. University of Arkansas EDRE, Working Paper 2017–19, October 13.CrossRefGoogle Scholar
Costrell, RM and Podgursky, M (2008) Peaks, cliffs, and valleys. Education Next 8, 22–28.Google Scholar
Costrell, RM and Podgursky, M (2009) Peaks, cliffs and valleys: the peculiar incentives in teacher retirement systems and their consequences for school staffing. Education Finance and Policy 4, 175–211.CrossRefGoogle Scholar
Costrell, RM and Podgursky, M (2010 a) Distribution of benefits in teacher retirement systems and their implications for mobility. Education Finance and Policy 5, 519–557.CrossRefGoogle Scholar
Costrell, RM and Podgursky, M (2010 b) Golden handcuffs: teachers who change jobs or move pay a high price. Education Next 10, 60–66.Google Scholar
Fitzpatrick, MD (2015) How much Are public school teachers willing to pay for their retirement benefits? American Economic Journal: Economic Policy 7, 165–188.Google Scholar
Goldhaber, DD and Holden, K (2018) How much do teachers value deferred compensation? Evidence from defined contribution rate choices, RAND Education, Working Paper 1238.CrossRefGoogle Scholar
Kansas Public Employees Retirement System (2017) Valuation Report as of December 31, 2016, Cavanaugh Macdonald, July 10.Google Scholar
Kim, D (2016) Worker Retirement Responses to Pension Incentives: Do They Respond to Pension Wealth? Department of Economics, University of Missouri.Google Scholar
Koedel, C and Podgursky, M (2016) Teacher pensions. Chapter 6. In Hanushek, EA, Machin, SJ and Woessmann, L (eds), Handbook of the Economics of Education, vol. 5, Amsterdam: North-Holland Elsevier, pp. 281–303.Google Scholar
Lueken, M (2017) (No) Money in the Bank: Which Retirement Systems Penalize New Teachers? Washington, DC:Thomas B. Fordham Institute.Google Scholar
Novy-Marx, R and Rauh, JD (2009) The liabilities and risks of state-sponsored pension plans. Journal of Economic Perspectives 23, 191–210.CrossRefGoogle Scholar
Rhee, N and Fornia, WB (2016) Are California Teachers Better off with a Pension or a 401(k)? UC Berkeley Center for Labor Research and Education.Google Scholar
Rhee, N and Fornia, WB (2017) How do California teachers fare under CalSTRS? Applying workforce tenure analysis and counterfactual benefit modeling to retirement benefit evaluation. The Journal of Retirement 5, 42–65.CrossRefGoogle Scholar
Richwine, J and Biggs, AG (2011) Assessing the Compensation of Public-School Teachers, Heritage Center for Data Analysis, November 1, 2011, Washington, D.C.Google Scholar
Samuelson, PA (1963) Risk and uncertainty: a fallacy of large numbers. Scientia 98, 108–113.Google Scholar
Schmitz, K (2016) Breaking Down Kansas’ New Retirement Plan for Teachers, Bellwether Education Partners, TeacherPensions.org, October 4, 2016.Google Scholar