Teacher Retirement Benefits: Analyzing the Preferences of Entering Teachers

Most U.S. public school teachers participate in defined benefit retirement plans, which base benefits on years of service and their last few years of salary. These plans are often backloaded and include sharp economic incentives.

This article considers the implications of transitioning to a cost-equivalent defined benefit plan under which teachers would earn benefits more evenly across their careers. New teachers who are risk averse would prefer the alternative plan. The magnitude is often substantial. For example, for an entering teacher the certainty equivalent for the CB plan is about 2.1 times the certainty equivalent for the respective FAS plan in New York City and 29 times larger than the respective heavily backloaded FAS plan in Philadelphia.

The empirical evidence suggests that on average workers are risk averse (see Chetty 2006 https://www.aeaweb.org/articles?id=10.1257/aer.96.5.1821), and that teachers may be particularly risk averse (Bowen et al 2015 https://eric.ed.gov/?id=EJ1054665). Given the empirical literature it is safe to assume that most teachers exhibit some risk aversion and that, as a profession, teachers may be somewhat more risk averse than the general college educated workforce.

 

New teachers who are certain that they will teach for a long time under a single retirement, will prefer the more backloaded system. However, the analysis shows that a teacher would need to be certain they would teach under the same system for 10-20 years for them to prefer the backloaded system.