How to Pay Teachers More without Busting the Bank

Signs at a rally as public school teachers strike in Denver, Colo., February 12, 2019. (Michael Ciaglo/Reuters)
By balancing the ratio of salaries to retirement benefits and reforming pension structures, we can vastly improve the quality and cost of teacher compensation.

Among Democratic presidential hopefuls, it’s become an article of faith that all teachers in America deserve a raise. Bernie Sanders says the starting salary for teachers should be at least $60,000. Kamala Harris wants to give teachers an average raise of $13,500 — at a cost of $315 billion over ten years, according to her campaign.

Sanders, Harris, and other politicians are astutely responding to demands leveled by educators who participated in the national wave of teacher strikes that started around this time last year. But is teacher pay too low, or are the taxpayer dollars that fund salaries simply being misallocated? The question is worth investigating before we commit to breaking the bank.

It’s true that public-school teachers are paid less than private-sector professionals with similar amounts of training. But the difference in total compensation is smaller when teachers’ generous retirement packages are taken into account. Too much of a teacher’s total compensation goes to retirement relative to salary, and that compensation structure is due for an upgrade. Studies suggest that teachers would rather bring home larger chunks of their pay. Cornell University economist Maria Fitzpatrick estimates that public-school teachers value $1 of additional retirement benefits at only 20 cents. A recent study by University of Missouri economists Cory Koedel and P. Brett Xiang found that a pension enhancement designed to increase retention, at a taxpayer cost of about $183 million, essentially failed to deliver.

Many professionals undervalue retirement savings. But combine teachers’ low valuation of retirement dollars with the funky payment allocation in their field (smaller salaries with bigger pension benefits) and it’s no wonder they feel underpaid.

Reallocating a portion of teachers’ retirement benefits to salary is a good first step toward fixing the problem using existing resources. But by also redesigning the teacher-pension apparatus, states could actually offer new teachers a retirement plan that is more attractive and less lopsided, if also less hefty on average, than it’s been in the past.

Private-sector professionals commonly receive annual retirement benefits based on a percentage of their salary. In contrast, public-school teachers receive little to no employer-sponsored retirement benefits in their early- and mid-career years, and then suddenly become eligible for bloated benefits as they near retirement.

This phenomenon, known as backloading, means that the total compensation for longer-tenured teachers is much higher than for younger teachers. For instance, my Manhattan Institute colleague Josh McGee and I calculated that in New York City, a teacher in their 35th year earns about 27 percent more, salary-wise, than a teacher in their tenth year — but 79 percent more in total compensation when the value of their retirement benefits is taken into account.

In short, backloading means that when early- and mid-career teachers leave the profession, they do so before they have accrued meaningful retirement benefits for the time they worked. Bellwether’s Chad Alderman calculates that in only one state (Utah) do the majority of entering teachers remain employed long enough to receive pension payments that are larger than their own retirement contributions. In the median state, only about 20 percent of teachers remain long enough to maximize their retirement benefits.

States should replace their existing backloaded plans with cash-balance plans that similarly guarantee a teacher’s benefits — but also provide annual benefits based on a percentage of their salary. Cash-balance plans are more valuable to entering employees because they eliminate the risk of forgoing retirement benefits if teachers transition out of the field.

By moving to a cash-balance plan, states could actually cut total teacher compensation and still offer entering teachers better retirement plans. If New York moved to a cash-balance plan, for example, it could cut its retirement-contribution percentage by 67 percent and still offer entering teachers a package as desirable as the current plan. Indeed, even after such a Draconian cut, 51 percent of entering teachers would receive a larger benefit under a cash-balance plan.

Let me be clear: States should not cut teacher compensation, and there is room to debate whether we should pay teachers more. But we shouldn’t just throw more taxpayer dollars at an inefficient system that doesn’t align with teacher priorities. Instead, by balancing the ratio of salaries to retirement benefits and adopting a more equitable pension structure, policymakers can vastly improve the quality and cost of teacher compensation.

Marcus A. Winters is a senior fellow at the Manhattan Institute and an associate professor at Boston University’s Wheelock College of Education & Human Development.


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