Two Center for American Progress reports raise important questions about proposals to switch to cash-balance plans in California and elsewhere, but more research is needed.
 

Contact:

Jamie Horwitz
202-549-4921
jhdcpr@starpower.net

Teresa Ghilarducci
646-369-7136
Teresa.Ghilarducci@gmail.com
 

BOULDER, CO (November 22) – At a time when California’s governor has proposed a major change to that state’s public employees’ pension plan, the Center for American Progress has released two timely reports that consider the potential benefits and detriments of scrapping traditional defined-benefit pension plans for teachers in favor of cash-balance plans. A new review of the reports finds that while they have some limitations, they raise important issues in the face of limited knowledge.

In cash balance plans, teachers and employers contribute a share of the employee’s salary into an account that earns a defined rate of return so that the pension value becomes a constant percentage of salary based on career-average earnings rather than just based on the last few years of earnings. California Governor Jerry Brown on October 27, 2011 proposed such a plan for California’s new teachers. Under the new plan, retiring teachers with 35 years of service would receive 75 percent of their career-average salaries. By comparison, under the current defined-benefit pensions, teachers who retire at age 64 with 35 years of service have pensions worth 84 percent of final pay.

These two new reports will most likely be cited in discussions about how such new pension proposals may affect teacher quality and effectiveness in California and elsewhere. The reports, Redefining Teacher Pensions: Strategically Defined Benefits for New Teachers and Fiscal Sustainability for All, by Raegen T. Miller, and Buyer Beware: The Risks to Teacher Effectiveness from Changing Retirement Benefits, by Christian Weller, were reviewed for the National Education Policy Center’s Think Twice think tank review project by Teresa Ghilarducci, a nationally recognized expert on pensions and a professor of economics at the New School for Social Research and Director of the Schwartz Center for Economic Policy Analysis.

The review is published by the National Education Policy Center, housed at the University of Colorado Boulder School of Education.

Nearly 90 percent of public school teachers currently have defined-benefit plans, but there is growing interest in changing approaches, in hopes that a change might save states and school districts money.

The two Center for American Progress reports examine the potential costs and benefits. They point in two different directions, with one concluding that converting to a cash-balance plan might have benefits, while the other warning that the approach would likely end up costing more and creating incentives for the exit of peak-performance teachers from the profession. Both reports, however, conclude that current teachers’ benefits should not be cut and that, if states convert to a cash-balance plan, they should maintain average pension benefits and strive to not cut benefit costs.

Ghilarducci notes approvingly that the reports acknowledge the relatively scant research that currently exists on the questions they raise. She also praises Buyer Beware because it “refers to the scholarship on why teachers decide to stay in their jobs and therefore backs off from making too many claims about how important pension design is” regarding teachers’ decisions to stay or leave the profession. Yet, “if we accept that the incentives built into pension plans have an important effect on teachers’ choices to remain in the profession, the next question is how to structure those incentives,” Ghilarducci writes.

Buyer Bewarewarns that converting to cash-balance plans would likely increase teacher turnover, increasing training costs and reducing funds for raises for new teachers. The likely net result, the authors argue, is that districts would lose experienced teachers and thus see a decline in teacher effectiveness.

In contrast, Redefining Teacher Pensions argues for switching to cash-balance plans, asserting that traditional plans provide little incentive for younger teachers to remain in the profession during their most productive years. Ghilarducci points to weaknesses in some of the assumptions underlying this claim and its repercussions for quality teaching and cost savings. In particular, she notes this change is likely to cost additional money, at least in the short term, and it also changes incentives away from retaining those teachers with enough experience to have reached their peak performance.

Ghilarducci notes that both reports would have been stronger had they included a critical analysis of the history of teachers’ pensions and taken into account larger social trends – from the expansion of women’s occupational choices over the last several decades to changes in household structures that have given women greater concern about their financial prospects.  She points out that it is these larger trends that likely have played a role in the makeup of the teaching profession and probably influenced how the still-predominantly-female teaching profession looks at benefits such as pensions.

Ghilarducci concludes: “These two reports are valuable contributions, not so much because of the proposals they set forth but as flags for the complicated and sometimes counter-productive effects of many current proposals.”
 

Find Teresa Ghilarducci’s review on the NEPC website at:

http://nepc.colorado.edu/thinktank/review-redefining-teacher-pensions.
 

Find Redefining Teacher Pensions. Strategically Defined Benefits for New Teachers and Fiscal Sustainability for All, by Raegen T. Miller, on the web at:  http://www.americanprogress.org/issues/2011/09/redefining_teacher_pensi….
Find Buyer Beware: The Risks to Teacher Effectiveness from Changing Retirement Benefits, by Christian Weller, on the web at:  http://www.americanprogress.org/issues/2011/09/buyer_beware.html
 

The Think Twice think tank review project (http://thinktankreview.org), a project of the National Education Policy Center, provides the public, policy makers, and the press with timely, academically sound, reviews of selected publications. The project is made possible in part by the support of the Great Lakes Center for Education Research and Practice.

The mission of the National Education Policy Center is to produce and disseminate high-quality, peer-reviewed research to inform education policy discussions. We are guided by the belief that the democratic governance of public education is strengthened when policies are based on sound evidence.  For more information on NEPC, please visit http://nepc.colorado.edu/.
 

This review is also found on the GLC website at http://www.greatlakescenter.org/.