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Title: Do Public School Teachers Value Their Retirement Benefits?
Citation Type: Miscellaneous
Publication Year: 2010
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Abstract: Teachers, and public sector employees more generally, tend to receive relatively large portions of their employment compensation in pensions and other non-salary benefits. For example, teachers in the Illinois Teacher Retirement System received $3.5 billion in pension benefits payments in 2009. At 40 percent of the year's payroll for member teachers, these benefits represent large costs to taxpayers in the form of deferred compensation. The introduction of an option for public school employees in Illinois to purchase additional retirement benefits provides an opportunity to examine how teachers value such benefits through the measurement of their demand and cost schedules. The price of the annuity was based on the teacher's salary and accumulated experience as of 1998. Because a teacher's salary is likely correlated with her annuity demand and subsequent collection for reasons other than just the salary's determination of the price she pays, I use a simulated instrumental variables framework to estimate employee demand for the extra retirement benefits relative to the costs of providing them. On average, the willingness to pay for the upgrade is almost $110,000 less per employee than the cost of the increased benefits it provides, thus ruling out a worker-preference theory as the main justification for large pensions. Relative to other forms of compensation such as current wages, other benefits and working conditions, pensions are an extremely costly and unwieldy tool for attracting high quality teachers. What is more, currently there is great concern about the inability of state and local governments to pay their promised pension benefits (Leiber 2010) and to balance their budgets more generally (Powell 2010). The finding that pension benefits at the margin are worth much less to public employees than they cost to provide suggests reducing benefits may be a more efficient policy than increasing taxes for balancing pension budgets.
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Authors: Fitzpatrick, Maria, D
Publisher: IFO institute for economic research
Data Collections: IPUMS USA
Topics: Education
Countries: United States