Cross-Subsidization of Teacher Pension Costs: The Impact of Assumed Market Returns

Costrell, Robert M.; McGee, Josh B.

doi:10.2139/ssrn.3060795

Cited by 3 publications

(4 citation statements)

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“…In this paper, we take the assumptions as given to analyze the cross-subsidies within generations that are built into the system's funding plan, as distinct from the cross-subsidies between generations when the assumptions fail. In subsequent work, we incorporate cross-subsidies across generations that arise from the failure to meet assumed investment returns (Costrell and McGee 2017).…”

Section: Introductionmentioning

confidence: 99%

Cross-Subsidization of Teacher Pension Costs: The Case of California

Costrell

McGee

2019

Education Finance and Policy

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The value of pension benefits varies widely, by a teacher's age of entry and exit. This variation is masked by the uniform rate of annual contributions, as a percent of pay, to fund benefits for all. For the first time, we unmask that variation by calculating annual costs at the individual level. In California, we find that the value of a teacher's benefits ranges from about 4 to 22 percent of pay, and exhibits some idiosyncratic patterns, as is endemic to traditional pension plans. The variation in individual cost rates generates an extensive but hidden array of cross-subsidies, as winners receive benefits worth more than the uniform contribution rate, and losers receive less. Almost two thirds of all entering teachers, past and present, are losers in California. By contrast, a prominently invoked study finds that nearly all active teachers are winners there. That result is shown to be highly skewed by excluding the losses of prior entrants who left early, thereby violating the funding fact that the gains and losses of winners and losers must offset each other. Our main policy conclusion is that cash balance plans can rationalize or eliminate the current system of cross-subsidies and provide the transparency lacking in traditional plans.

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Section: Introductionmentioning

confidence: 99%

Cross-Subsidization of Teacher Pension Costs: The Case of California

Costrell

McGee

2019

Education Finance and Policy

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“…In recent years, however, the gap between actual and assumed returns has generated large cross-subsidies across generations. Indeed, related work on CalSTRS (Costrell and McGee, 2017b), aimed at an integrated treatment of cross-subsidies across and within cohorts, finds that virtually all current entrants can easily be losers, by virtue of the steady state amortization payments to cover benefits of previous cohorts, if the assumed return is held somewhat higher than the actual return. It should be noted that CB planslike other, more traditional DB plans, and unlike DC planscan also run up unfunded liabilities and generate cross-subsidies across generations.…”

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confidence: 99%

“…Earlier versions of this paper were presented at RAND Corporation's 'Teacher Pension Workshop: Connecting Evidence Based Research to Pension Reform,' Santa Monica, CA, March 9, 2018 (Costrell, 2018d), and at APPAM Fall Research Conference, November 4, 2017, Chicago (Costrell and McGee, 2017b). The author thanks Andrew Biggs for comments on the 2017 AEFP conference version of Costrell and McGee (2017a), which helped lead to this paper, and Ken Kriz and Cory Koedel for comments on Costrell and McGee (2017b) at the 2017 APPAM conference. The author gratefully acknowledges research support from the Laura and John Arnold Foundation.…”

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confidence: 99%

Cross-subsidization of teacher pension benefits: the impact of the discount rate

Costrell

2018

Journal of Pension Economics and Finance

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This paper builds on previous work (Costrell and McGee, 2017a, Education Finance and Policy) on the redistribution of teacher pension benefits, as measured by the wide variation in individual normal cost rates by age of entry and exit, and the associated cross-subsidies. The further steps taken here are: (i) to examine the impact of the discount rate on the degree of redistribution, and the analytics behind it; and (ii) to identify the distribution of the market value of the pension guarantee. Using the example of the California State Teachers’ Retirement System, I find that: (i) high-assumed returns substantially understate the extent to which costs are redistributed for back-loaded plans; and (ii) the market value of the pension guarantee is highly concentrated among long-term teachers.

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“…(2016)) are a consequence of the failure to meet actuarial assumptions, particularly the return on investments(Costrell (2016a,b)). For analyses that incorporate cross-subsidies across generations that arise from the failure to meet assumed investment returns, seeCostrell and McGee (2017b).…”

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confidence: 99%

Teacher Pension Workshop: Connecting Evidence-Based Research to Pension Reform: Cross-Subsidization of Teacher Pension Costs: The Impact of the Discount Rate

Costrell¹

2018

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Cross-Subsidization of Teacher Pension Costs: The Impact of Assumed Market Returns

Cited by 3 publications

References 6 publications

Cross-Subsidization of Teacher Pension Costs: The Case of California

Cross-Subsidization of Teacher Pension Costs: The Case of California

Cross-subsidization of teacher pension benefits: the impact of the discount rate

Teacher Pension Workshop: Connecting Evidence-Based Research to Pension Reform: Cross-Subsidization of Teacher Pension Costs: The Impact of the Discount Rate

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