The Pressure on Teacher Salaries

Daniel DiSalvo of the Manhattan Institute posits that legacy pension costs are suppressing teacher pay in a report out today:

Across the nation, only seven states had pension plans that were 90% funded, none of them in the states experiencing the most teacher unrest in the past two years. To make up for past underfunding, contributions to current pension systems are a form of paying off debt. In Arizona, for example, 82.7% of the employer contribution to the teacher pension system goes to pay off unfunded liabilities. In Colorado, it is 81.4%; in Oklahoma, 77.3%; in Kentucky, 74.4%; and in West Virginia, 81.8%. The national average is about 70 cents on the dollar of the employer contribution going to pay off debt. …

Chad Aldeman has demonstrated that teacher retirement benefits cost twice as much as those for other workers as a percentage of total compensation (10.3% versus 5.3%). Furthermore, teachers receive about 25% of their total compensation in the form of benefits, especially health insurance and retirement benefits, compared with about 13% for private-sector workers. As Figure 6 indicates, benefits are an increasing slice of school employee compensation costs.

According to Figure 6 of the report, benefits have increased from 20% of total compensation for teachers nationwide to 28%.  This is important for three reasons:  For one, long-term benefits like pensions and other post-employment benefits (OPEB) only apply in full for employees who stay put, which creates the risk of losing their value and leaves the employees less mobility in their careers.

For another, state and local governments tend to deal with these legacy costs in part by reducing them for new employees, which means the cost of older teachers suppresses the pay of younger teachers, but the latter will not receive the full benefits even if they do stay put.  For a third, people don’t tend to price in the value of their retirements very well when it comes to their perceptions of their jobs, which leaves them feeling disgruntled.

According to the National Center for Education Statistics, whose data contributes to the Manhattan Institute report, public school teachers in Rhode Island have seen their salaries fall continually since 1990.  There is only so much money in budgets to pay for the services employees provide, and when huge amounts of it are going to pay for benefits earned in the past, only so much remains to cover pay in the present.

Actuarial reports from the state’s pension fund tell the story.  In 2005, the state and municipalities were paying 22% of total payroll toward teacher pensions, or $185 million.  By 2018, that was up to 25.25%, or $260 million, plus a 1% payment into defined-contribution plans, bringing the total to $271 million.  This 46% increase in the cost of pensions happened despite the pension reforms that set Rhode Island politics ablaze.

Any discussion of compensation in the public sector must consider these factors, but people often don’t do so even with their own income.  That makes it easy for politicians and special interests to stoke division and unrest.

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