Colleague: The Magazine of the College of Education and Health Professions

Researcher Wants to Help Navigate Pensions Through Stormy Waters

October, 2011

Every day, Bob Costrell visits a website called pensiontsunami.com. The University of Arkansas professor rides the turbulent waves with his research into pension systems that public employees, in particular school employees, depend upon for their retirement years.

 

Specialized sites such as Pension Tsunami – a clipping service based in California – are not the only place to find news about state pension systems, many of which are facing challenges because of unfunded liabilities. The news exploded with the force of a tsunami earlier this year when Wisconsin legislators fled the state to avoid a vote on Gov. Scott Walker's attempt to rein in spending on employee benefits, including pensions. Eventually, the lawmakers returned and Walker prevailed with his reform package that included removing the right of collective bargaining over health insurance and other fringe benefits.

 

Costrell holds the Twenty-First Century Chair in Education Accountability in the department of education reform. He joined the faculty of the College of Education and Health Professions in 2006 after a career at the University of Massachusetts and service as then-Gov. Mitt Romney's education adviser and chief economist.

The case in Wisconsin illustrated one of Costrell's contentions.

 

"When you look at pensions vs. retiree health benefits, pensions are getting more attention, but in many cases the health benefits are far more problematic," he said. "We have known since the 1960s and '70s that retirees would eventually grow far more than active employees. That is why pension plans started to pre-fund, but retiree health plans did not."

 

Costrell and Michael Podgursky, a professor of economics at the University of Missouri, Columbia, work together on pension research, publishing numerous articles in leading academic journals. Both are fellows at the George W. Bush Institute at Southern Methodist University.

 

"Contributions made by the employee and the employer during the employee's career should fund that employee's retirement," Costrell said. "The fact that baby boomers are retiring now should not create a strain on systems, if they are pre-funded, but many of these systems have fallen short."

 

On the Agenda

 

Since 2006, Costrell and Podgursky have studied many aspects of pension systems and their effects. They have published findings on both the structure of pension systems and the financing mechanisms.

 

In a recent Education Week article, Costrell and Podgursky proposed two principles for fixing broken pension systems: make the costs and benefits of educator pension plans transparent and clearly tie benefits to contributions. Specifically, they favor cash-balance plans, which look like 401(k) accounts, but without pushing the risk onto teachers.

 

"Educators and policymakers need to have a clear understanding of the dollar value of these benefits and the possible trade-offs between their current salaries and their deferred benefits," they wrote on the first principle.

 

Tying benefits to contributions would have important workforce implications, they wrote on the second principle.

 

"First, it would provide rational incentives for choosing between retiring from teaching and continuing to work," according to Costrell and Podgursky. "Linking benefits to contributions would also eliminate the massive penalties teachers face when they move to school systems in a different state."

Courtesy of Education Next

 

The researchers have shown how these principles can relate to teacher quality. They found that the structure of teacher pension plans typically provides strong incentives to follow a specific career path that may be well-suited to some teachers but not others. Some teachers in their 40s may find themselves better suited to a career change but hang on for their pension, while some in their 50s may still have good years to offer but are penalized financially for staying on, Costrell and Podgursky wrote in a special issue of Education Finance and Policy last year.

 

"Even teachers who feel burned out after 20 years would be crazy to leave so they spend five more years in the classroom until they qualify for early retirement," Costrell said. "Reaching that year can be worth up to five times their salary. Most teachers don't go into the field for the money, but no teacher can ignore the implications worth hundreds of thousands of dollars for retirement."

 

Reaching Out

 

Costrell and his fellow researchers around the country have provided information for policymakers in addition to their journal articles. They have worked with educational foundations and action-oriented think tanks on pension-related topics, and they have sponsored several conferences bringing together expertise in the field. They have sent information from their research to legislators and chief state school officers. Costrell has trained several graduate students in teacher pension research to help meet the demand.

 

"Policymakers are keenly interested in the topic," Costrell explained. "Robert Scott, the Texas commissioner of education, is interested in how pension systems can enhance educational goals, how to get the best teachers into the schools that need them the most, all the while cognizant of the fact that pension systems can eat up the educational budget."

 

The next phase of his research is studying transition costs and implementation of changing from one type of pension structure to another, Costrell said.

 

"We know what systems we think make the most sense," he said. "What are the obstacles is the question we want to answer."

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