Rethinking the Structure of Teacher Retirement Benefits: Analyzing the Preferences of Entering Teachers

Abstract

Most U.S. public school teachers participate in defined benefit retirement plans, which base benefits on years of service and their last few years of salary. These plans are often backloaded and include sharp economic incentives. We consider the implications of transitioning to a cost-equivalent defined benefit plan under which teachers would earn benefits more evenly across their careers. We show that new teachers who are risk averse would prefer the alternative plan. The magnitude is often substantial. For example, for an entering teacher the certainty equivalent for the CB plan is about 2.1 times the certainty equivalent for the respective FAS plan in New York City and 29 times larger than the respective heavily backloaded FAS plan in Philadelphia.