Benefit or Burden? On the Intergenerational Inequity of Teacher Pension Plans

Abstract

Most public school teachers in the United States are enrolled in defined benefit (DB) pension plans. Using administrative microdata from four states, combined with national pension funding data, we show these plans have accumulated substantial unfunded liabilities—effectively debt—owing to previous plan operations. On average across 49 state plans, an amount that exceeds 10% of current teachers’ earnings is being set aside to pay for previously accrued pension liabilities. To the extent that the costs of the unfunded liabilities drag on teacher compensation, they may exacerbate problems of teacher recruitment and retention. We briefly discuss three policy changes that could end or reduce the accumulation of unfunded liabilities in educator pension plans: (1) transition teachers to defined-contribution retirement plans, (2) transition teachers to cash-balance retirement plans, and (3) tighten the link between funding and benefit formulas within the current defined-benefit structure.