Relocating Educators Suffer Pension Hit

November 12, 2009 (PLANSPONSOR.com) – A 30-year veteran public school teacher who moves and splits employment between two state retirement systems is at risk for losing well over one-half of his or her pension wealth, according to new study.

A news release said the research was from economists Robert M. Costrell of the University of Arkansas and Michael Podgursky of the University of Missouri-Columbia. Costrell and Podgursky examined pension funds in six states and found that compared to a neutral cash balance system, the type of defined benefit pension system which covers almost all public school teachers redistributes about half the pension wealth of an entering cohort of teachers who subsequently retire in their mid-50s from those who leave the system earlier.

One of the main reasons for this inequality in benefits is that teachers who teach into their 50s can start collecting a pension immediately, while teachers who leave earlier often must defer their pension until age 60 or later, collecting fewer payments over their retirement, according to the research.

The researchers found that a hypothetical educator who starts teaching at age 25 and spends 15 years in one job before moving to another state and teaching for 15 more years, loses substantial amounts of net pension wealth. In Ohio, for example, the loss by age 55 of a teacher who moves at age 40 would be more than $520,000 or 74% of net pension wealth. In Missouri, the loss would be more than $400,000 or 65%.

Most state pension systems create severe disincentives that, in effect, handcuff teachers to a single state, the two researchers asserted. This affect applies to both public school teachers and charter school teachers where the charter school participates in the state pension system.

In addition, as the market for administrators in urban school districts is also increasingly becoming national in scope, administrators are forced to suffer similar pension penalties for moving, the researchers said.

More information is available here.

Fred Schneyer
editors@plansponsor.com