Professor Evaluates Ohio Teacher Pension Plan

Photo Submitted

Robert Costrell

FAYETTEVILLE, Ark. — University of Arkansas professor Robert Costrell co-authored a report released today that finds one of the nation’s largest public pension systems for teachers fails two major tests of sound fiscal policy.

Costrell holds the Twenty-First Century Chair in Education Accountability in the department of education reform. He was formerly chief economist and education adviser to former Gov. Mitt Romney of Massachusetts. Costrell teamed with Michael Podgursky, professor of economics at the University of Missouri-Columbia, for the study of Ohio’s teacher retirement system. The study was commissioned by the Thomas B. Fordham Institute, which is based in Washington. and also operates from Dayton, Ohio.

The Ohio pension system doesn’t meet basic public policy requirements of transparency and efficiency, and it contains perverse incentives, the professors concluded.

“As a result, Ohio’s pension system almost certainly hinders rather than helps in the recruitment and retention of a highly qualified teacher work force,” they wrote. “Teacher pensions are increasingly out of step with trends elsewhere in the labor market.”

The report can be accessed online at http://www.edexcellence.net/institute.

In commenting about the report, Costrell said the Arkansas teacher-retirement pension system has problems similar to those identified in the Ohio system. Both are defined benefit systems, originally thought to encourage classroom longevity but instead creating powerful incentives for teachers to retire in their 50s.

“Arkansas faces the same issues,” Costrell said. “Arkansas is tilted even more toward early retirement. This exacerbates teacher shortages, particularly in some rural areas of our state.”

Currently, the Ohio system’s assets fall far short of accumulated pension and health insurance liabilities, and its board has voted to seek legislative action increasing contributions to the system. The Costrell-Podgursky report made four key points in concluding that Ohio state officials should consider a shift to a cash balance or defined contribution system.

• The Ohio teacher pension system encourages early retirement. The idiosyncratic pattern of pension-wealth accumulation is not smooth and steady but rises with fits and starts after age 50 and actually decreases at 35 years of service. With rising life expectancies, many retirees can expect to collect pensions for as many years as they taught.

• The system hinders mobility because young teachers would suffer serious losses in pension wealth if they moved out of the defined benefit system into another teaching or non-teaching job. This keeps young teachers from applying for jobs where they may be needed more and is completely out of line with the high levels of job mobility among most of today’s young college graduates.

• The system lacks transparency. Teacher pension systems such as Ohio’s, and the incentives they create, have become remarkably complex and opaque, allowing the system to evolve into a costly and complicated irrational incentive structure with a pattern of pension wealth accrual that defies logic.

• Ad hoc fixes have created further complexity and costs. Ohio has one of the most liberal schemes in the nation permitting teachers to collect their pensions while continuing to work full time as a teacher.

A defined benefit system guarantees the participant a certain monthly payment after retirement while a defined contribution system ties benefits to the contributions by employee and employer. A cash balance system is very similar to the defined contribution system except the return is guaranteed by the employer in the cash balance plan so the market risk is not borne by the employee.

Changing to a cash balance or defined contribution system would restore neutrality to the pension plan so that each additional year of work would add additional pension wealth in a fairly uniform way instead of creating jumps or drops in pension wealth at particular years of service. It would also increase transparency so that the accrual of benefits is simple and clear and would eliminate opportunities for gaming the system.

A cash balance or defined contribution system would move the pension system away from being subject to the pattern of benefit enhancements when the stock market is up, followed by funding shortfalls and contribution hikes when the market turns sour.

From 1999 to 2006, Costrell served in major policy roles for three governors of Massachusetts, and he was a member of the economics department of the University of Massachusetts at Amherst from 1978 to 2006.