As a result of the current financial crisis, many employers, including school districts, are closely examining their compensation packages offered to employees. Benefit costs have become an increasingly important component of teacher compensation in recent years so they are attracting their fair share of attention from researchers.
The most recent data from the U.S. Department of Education (2005–06 school year) indicates that total benefits added about 32 percent to salaries, which is an increase from 25 percent in 1999–2000. The increase not only reflects the rise in health insurance costs, but also includes the growing costs of retirement benefits.
The findings of a research study conducted by Robert Costrell, professor, University of Arkansas, and Michael Podgursky, professor, University of Missouri-Columbia, support conventional wisdom that holds that the cost of retirement benefits for teachers is higher than for private-sector professionals.
Costrell and Podgursky used data collected by the U.S. Department of Labor to track changes in retirement costs and compare employer contributions to retirement for public school teachers with those for private-sector professionals. The data revealed that the rate of employer contributions to retirement benefits for public school teachers in 2008 is substantially higher than for private professionals: 14.6 percent of earnings for teachers versus 10.4 percent for private professionals. Additionally, between March 2004 and September 2008, the gap widened. The difference more than doubled, rising from 1.9 to 4.2 percentage points.
Their analysis showed that the employer contribution rates for public school teachers are a larger percentage of earnings than for private-sector professionals and managers, regardless of whether teachers are in Social Security.
The study cites several reasons why employer contributions to retirement are higher for teachers. First, nearly all teachers are covered by traditional defined benefit (DB) pension plans, in which employees receive a regular retirement check based on a legislatively determined formula. The plans typically offer retirement at a young age and at a rate that replaces a substantial portion of final salary. This is evident when you compare the median retirement age for public school teachers, 58 years, to about 62 for the labor force as a whole.
Also, nearly all teacher retirement plans have some sort of built in cost-of-living adjustment. There are few if any comparable retirement plans for professionals and lower-tier managers in the private sector.
What does the future hold for the cost of teacher retirement benefits? The researchers say no one knows for sure, but they identified two key factors that will drive these costs: future developments in the benefits themselves and in their funding.
In short, Costrell and Podgursky say, “There are good reasons to believe that the contribution gap we have documented will continue to widen in coming years.”
—“Teacher Retirement Benefits,” by Robert M. Costrell and Michael Podgursky, Education Next, Spring 2009.
