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Study Questions 'Backloading' of Teacher Compensation

Given the choice between even more generous pension benefits or an up-front salary increases, teachers may prefer the latter, concludes a fascinating new paper that raises pointed questions about how teacher compensation is structured. 

Under an unusual 1998 voluntary plan, Illinois teachers were willing to trade only about up to 20 cents of their current salary for each dollar of a more-generous pension payout later, according to the analysis by Cornell University's Maria Fitzpatrick, an assistant professor in Cornell University's department of policy, analysis, and management.

Fitzpatrick made use of an interesting policy shift for her research, published as a working paper at the National Bureau for Economic Research. Under a 1998 Illinois policy change, teachers could pay a fee in exchange for an increased rate of accrual in future pension benefits. The fee was equal to one percent of a teacher's highest salary for the past four years. (That's a significant cost, but since the fee could be collected over time, teachers didn't necessarily have to have all the cash on hand at once in order to participate.)

For the study, Fitzpatrick used data from the pension system crosschecked against an administrative data set over a 20-year period, and examined them for patterns regarding teachers' participation in the plan. From the sample, the researcher excluded teachers with more than 28 and fewer than 22 years of experience, the former because some of them had already begun to retire when the option was offered, and the latter because those teachers still had many years to decide whether or not to participate.

Of the sample, most of the teachers who participated in the plan paid in the neighborhood of about $15,000 for a (deferred) benefit later of nearly six-and-a-half times that. When put on a graph, that indicates that teachers were most likely to participate only when costs didn't rise above about 20 cents of current pay for every dollar of later benefit. 

Here's a visualization from the research. The big blob of circles shows that most of the teachers who paid the fee to upgrade did so at the same general range of pricing. 

Capture_FP_pensions.JPGThis may all seem hopelessly academic, but it raises an interesting practical issue: For whatever reason—maybe teachers were saving for a mortgage, taking care of an elderly parent, or dealing with their kids' college tuitions—most teachers didn't really feel it was worth trading in more of their current salary for future earnings.

Fitzpatrick argues that that's possibly because so much of teachers' compensation is already so heavily invested in benefits rather than up-front cash.

"Public sector workers have a lot of this one particular asset, their defined-benefit pension, and it's a very specific asset," she said in an interview. "It's something you can't borrow against, it's not liquid, and it's not diversified." 

She stressed that her findings don't at all mean teachers don't value their pensions generally speaking. But it does suggest they'd prefer that additional compensation be put in the form of salaries.

There's an important policy implication here when you consider that both traditional teacher-salary schedules and defined-benefit pensions are heavily backloaded, rewarding teachers that have stuck around for a long time. There have been efforts to try to upend that by "frontloading" salaries—under the theory that it will make the profession more attractive and increase the quality of the candidate pool, for instance. But they haven't really caught on.

And it's a question worth prodding, Fitzpatrick said. 

"It calls into question the way that we're paying teachers," she said about her study's implications. "On the margins at least, we could be increasing salary rather than pensions, and potentially getting more for it." 

Teachers' unions have tended to get a lot of blame for the shape of the current salary structures. As the representatives of teachers in bargaining, they have certainly have played a role. But it's worth remembering that historically, policymakers have also traditionally preferred improving pension benefits to increasing salaries via revenue increases. Why? Because that way, they got the credit for helping out teachers—while pushing off the bill until someone else is in office. 

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