New Study: Case for Cash-Balance Teacher Pensions

Cost-neutral benefit shift would slightly improve student experience and greatly benefit new teachers.

NEW YORK, NY — How do today’s teacher pensions affect students? Proponents of traditional plans argue that they incentivize teachers to remain in the same school system until retirement—a boon to students. A new Manhattan Institute report, however, finds that shifting to cost-neutral cash-balance (CB) plans would slightly increase the quality of teachers and thus student achievement, while greatly benefiting entering teachers.

In this report, part of a series of research on CB plans, Manhattan Institute Senior Fellows Josh B. McGee and Marcus Winters compare expected teacher quality under current retirement plans to that of a cash-balance design that would give teachers more flexibility.

Supporters of today’s final-average-salary defined-benefit (FAS-DB) plans argue that moving to a more flexible system, such as a CB plan, would harm students by making it easier for mid-career teachers to leave the classroom. On the contrary, using an empirically grounded simulation, McGee and Winters show that changing to a CB plan would be expected to have little impact on teacher quality throughout the public school system. In fact, given what is known about teacher quality and attrition behavior from prior empirical research, such a change is predicted to slightly increase teacher quality.

This is the third in a series of Manhattan Institute papers titled “Better Pay, Fairer Pensions,” which explores the effects of teacher pension reform. In a previous installment, McGee and Winters showed that entering teachers would benefit substantially from moving to a CB plan. In sum, their research shows that switching to a CB system would benefit entering teachers, have slight positive impact on students, and be cost neutral to taxpayers.

Click here to read the full report.