A national study of the net benefitsof state pension plans for educators

Although benefits can be a sizable part of an educator's total compensation, there has been little scholarly inquiry into the state pension plans for educators. Despite the fact that all defined benefit plans rely on the same basic formula for calculating annual pensions, they vary across states in the multiplier used, the method for calculating final average salary, the cost of participating in the plan, whether caps are imposed on first-year benefits, how cost-of-living increases are made, whether benefits are subject to state income taxes, and whether educators can retain Social Security benefits. All of these factors can influence the total pension received by educators. Educators are unlikely to know the net effect of the parameters used in each state's plan on their net benefits and how the net benefits compare across states. This study addresses this aspect of educator compensation by analyzing the differences among state-run defined benefit plans and how these plans can affect the net benefits for educators. The first portion of this article reviews the empirical and theoretical literature on retirement benefits and their effects on the labor market decisions of educators. The second section describes how to calculate the net benefits from state-run defined benefit plans, and how the components of these plans can affect an educator's retirement compensation. Next, data are used on the defined benefit plans for educators in 49 states to estimate the net retirement compensation for educators and demonstrate how the net benefits vary across states. Finally, this article concludes with some suggested implications of changes in pension systems for educators and directions for future research.