How Much Do Teachers Value Compensation Deferred for Retirement? Evidence From Defined Contribution Rate Choices

Abstract

How much do teachers value compensation deferred for retirement (CDR)? This question is important because the vast majority of public school teachers are covered by defined benefit pension plans that “backload” a large share of compensation to retirement relative to the compensation structure in the private sector, and there is scant evidence about whether pension structures are consistent with teacher preferences for current compensation versus CDR. This study examines a unique setting in Washington State, where teachers are enrolled in a hybrid pension system that has both defined benefit and defined contribution components. We exploit the fact that teachers have choices over their defined contribution rate to infer their revealed preferences for current versus CDR. We find that teachers on average contribute 7.23% of salary income toward retirement; 62% in fact elect to contribute more than the minimally required contribution of 5%. This suggests that teachers value CDR far more than suggested by prior evidence.