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February 13, 2013

Teacher Pensions Sweeter Than They Would Like You to Think

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The high cost of teacher pensions looms over the American public school system, but some defenders of the system would prefer that citizens not know that.

Pensions for teachers and other government employees are much more generous, on average, than the retirement benefits received by comparable private-sector workers. This is beyond serious dispute among finance economists. In fact, the average teacher pension costs taxpayers several times as much as a typical 401(k) costs private employers.

Fundamental reform is necessary. Unfortunately, defenders of the teacher pension system have advanced a series of misleading or illogical arguments aimed at preserving the system. These arguments, which I call “public pension fallacies,” are not part of the legitimate debate over which pension reforms might work best. Instead, the fallacies are attempts to persuade the public that teacher pensions are somehow much less generous or costly than they really are.

The fallacies are many and varied, but let’s start with the most common one — the average pension payment. The website of the Illinois Teacher Retirement System (TRS) features a section dealing with “issues and answers” regarding teacher pensions. According to the TRS, pension benefits “cannot qualify as ‘too generous’” because the average pension payment is only about $46,000 per year.

Now, $46,000 is not itself an insubstantial sum, but the average citizen could be forgiven for thinking that a teacher who retires soon after a full career will receive a pension of $46,000. That is wrong.

As with all “average pension payment” statistics, the $46,000 figure is misleadingly low. Included in the average are people who did not work full careers as Illinois public school teachers. Someone who works only five or 10 years as a teacher obviously would not earn a full pension from the state, just as someone who works five years at IBM would not expect IBM to finance his entire retirement.

Furthermore, the average pension payment includes teachers who retired years and even decades ago. The pension benefits earned by a teacher who retired in, say, 1993 have no bearing on what teachers who retire this year will collect.

For a fair comparison to private-sector retirement benefits, we want to know the pension payments made to full-career teachers who recently retired. The 2012 TRS report shows that the average teacher who retired in the previous fiscal year after 35 to 39 years of service collects a pension benefit of nearly $75,000 per year.

The average pension payment clearly tells us very little about pension generosity, despite what pension defenders would have us believe.

The pension is generous, but Illinois teachers don’t participate in Social Security — doesn’t that put them at a disadvantage compared with private-sector workers? This is another fallacy, one that was repeated frequently during last year’s teachers strike in Chicago.

Put simply, it’s good to be exempt from Social Security if you are an average middle- or upper-income worker. Think of it this way: Social Security is a good deal for you if the eventual benefits you receive (in present-value terms) are more than the taxes you pay into the system. For most middle-income workers such as teachers, this is not the case. Instead of paying payroll taxes, teachers exempt from Social Security can use that money to invest in safe assets (such as U.S. Treasurys) that will produce a benefit greater than Social Security payments. Therefore, if anything, nonparticipation in Social Security means that teacher pensions should be less generous, not more.

There are many other fallacies, including claims that pension funds can “assume away” investment risk and the idea that pension benefits paid from investment returns are somehow free to the taxpayer. All of these fallacies need to be corrected to improve public discourse on the pension issue and to remove impediments to education reform.

-Jason Richwine is the senior policy analyst in empirical studies at the Heritage Foundation.

First appeared in The Washington Times.

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