Pension Lock-Ins: Bad for Teachers, Taxpayers Alike

Pension Lock-Ins: Bad for Teachers, Taxpayers Alike
November 23, 2011

It’s a common story, one Bay Area residents know particularly well. You bought a shiny new iPhone late last year that can download all sorts of cool apps. But since AT&T is your wireless carrier and they’ve been having hardware outages, you can’t actually complete a phone call. Want to switch to Verizon? Oops, a nasty termination fee could cost you up to $325.

It’s called a lock-in. Sometimes, to align longer-term interests, they make sense. Many companies offer stock options employees can’t exercise for a few years. Organizations that make significant up-front investments in training don’t want employees immediately hitting the door with newly gained skills. Each of these is a well-understood strategy for increasing both employee commitment and retention.

But lock-ins can also breed complacency. You don’t need an economist to tell you that ending termination fees would cause an exodus of AT&T customers. Since AT&T’s primary business strategy has been to lock its customers in—either through exclusive iPhone rights or punitive contracts—is it surprising their service is so poor?

Pensions Lock Teachers In
Unfortunately, most teacher pension plans take the lock-in strategy to an extreme.

Pensions are an exploding flashpoint in states across the country. In Rhode Island, the state treasurer, a Democrat, and the governor, an Independent, have just called a special session to tackle the state’s immense pension woes. The state’s pension contribution has grown steadily from 5.6 percent of salaries in 2002 to approximately 23 percent in 2011, and it’s projected to grow to 35 percent in 2013.

Pension contributions, the fastest growing line item in Rhode Island’s budget, have doubled, from $139 million in 2003 to $302 million in 2010. By 2013, when the state’s $75 million in Race to the Top funds are supposed to be transforming its education system, required pension contributions are expected to double again, to $615 million.

Battles over teacher compensation and benefits often pit new teachers against veterans. But that’s not always the case in pension systems. While research shows teachers’ effectiveness increases quickly in their first few years, research also finds little difference in effectiveness between a teacher with five years of experience and one with 30. Yet many pension systems don’t even allow teachers to qualify for pension benefits until they’ve taught for ten years.

Not just the first-year teacher, but also the seventh year teacher is locked in. The early termination fee for leaving, or even moving to another state, equals tens of thousands of dollars in pension wealth.

Taking Considered Action
There are no easy answers to pension dilemmas. Just as it was tempting to increase benefits in more prosperous times, states should act conscientiously and not swing too far in the other direction. Pushing educators into the same retirement insecurity that plagues many Americans is not the answer.

Neither are pension lock-ins which continue for decades. For a teacher who passes the ten-year mark, the twelfth year of teaching is often worth much less in accrued benefits than the twenty-second year of teaching, which is worth less than the twenty-sixth year of teaching. Pension systems in Rhode Island and many other states highly reward some teachers, push others into premature retirement, penalize those who move, and are far from equitable, as teachers with similar abilities and responsibilities earn vastly different pensions.

Just as AT&T’s contract structure “rewards” customers who stay for two years and “encourages” customer retention, defenders of these pension designs say the plans’ heavily back-loaded benefits and lock-ins encourage seven-year teachers to stay till their tenth year and twenty-year teachers to stay into their next decade of teaching. Removing these elements, they fear, would lead to costly teacher turnover, decreasing the overall effectiveness of the teacher work force.

Perhaps they are right. But if so, we’re following the AT&T teacher retention strategy, relying on coercion rather than making teaching a vibrant profession people remain in by choice and desire. Let’s stop relying on financial handcuffs and design teachers’ roles so they want to stay.

Bill Tucker (btucker@educationsector.org) is the managing director for Education Sector. This article originally appeared on The Quick and the Ed and is reprinted here with permission. 

Image by Carlos Luz.