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Title: How Much Do Public School Teachers Value Their Retirement Benefits?
Citation Type: Miscellaneous
Publication Year: 2010
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Abstract: Public employers contribute three times more to retirement benefits per hour worked than their counterparts in the private sector. Given the potential burden on taxpayers of underfunded pensions, efficient compensation mechanisms for teachers and other public employees are an imperative. The question addressed in this research is whether teachers value deferred compensation at the cost of providing it. One explanation offered for the heavy use of deferred compensation in the public sector is that these packages attract high quality employees. These employees may have low discount rates or, for some other reason, prefer to trade off lower current wages for guaranteed future compensation. At what rate teachers are willing to forgo current wages for future compensation is difficult to measure because wages and pension benefits both move cyclically, making it hard to disentangle differences in valuations of each. The introduction of the opportunity provided in 1998 to Illinois public school employees to purchase additional pension benefits allows me to estimate employees' demand for retirement benefits relative to the cost of providing them. The price charged for this product is directly proportional to a teacher's current salary. Because a teacher's salary is likely correlated with her health and other factors affecting demand, I create a simulated instrument for prices using exogenous variation in program rules. The instrument uses variation in salary schedules at the district level, purging unwanted individual- level variation in salaries that might be correlated with employee take-up. Identification follows from district differences in teacher salary schedules prior to the product's introduction. The fact that conditioning on observed demographic factors and market characteristics does not change the estimate instills confidence that the relationship between price and demand is identified from exogenous variation in price. The results show that the majority of Illinois public school teachers are willing to pay just 17 cents for a dollar increase in the present value of expected retirement benefits. The findings therefore suggest substantial inefficiency in compensation as the public cost of deferred compensation exceeds its value to employees. The results of this study suggest a Pareto- improving policy solution: governments can offer to buy back promised pension benefits for just a fraction of their expected present value.
Url: http://econ.msu.edu/seminars/docs/Fitzpatrick Pensions.pdf
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Authors: Fitzpatrick, Maria, D
Publisher: Stanford Institute for Economic Policy Research
Data Collections: IPUMS USA
Topics: Education
Countries: United States