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Cross-Subsidization of Teacher Pension Normal Cost: The Case of CalSTRS

31 Pages Posted: 22 Oct 2016 Last revised: 23 Jan 2017

Robert M. Costrell

University of Arkansas - Department of Education Reform

Josh B. McGee

Manhattan Institute for Policy Research; Laura and John Arnold Foundation

Date Written: October 24, 2016

Abstract

Under traditional defined benefit pension plans, annual contributions are set at a uniform percentage of pay to fund accruing benefits. That normal cost rate masks wide variation in the cost of individual benefits, generating an extensive and non-transparent pattern of cross-subsidization. We provide a comprehensive analysis of cross-subsidies in employer contributions across all entry and exit ages. The gains and losses of winners and losers must add up to zero, and we explain why they do not in some previous work, which claims that nearly all teachers are winners in the California Teachers Retirement System. To the contrary, we find about two-thirds of all entrants are losers. The losers earn benefits with an average annual employer cost of 0.8 percent of pay, vs. 5.7 percent for the winners. In effect, this is a system of widely varying, but non-transparent employer matches to the employee contribution, unlike a retirement account plan with a uniform match.

Keywords: teacher pensions

JEL Classification: H75

Suggested Citation

Costrell, Robert M. and McGee, Josh B., Cross-Subsidization of Teacher Pension Normal Cost: The Case of CalSTRS (October 24, 2016). EDRE Working Paper No. 2016-17. Available at SSRN: https://ssrn.com/abstract=2857239

Robert M. Costrell (Contact Author)

University of Arkansas - Department of Education Reform ( email )

201 Graduate Education Building
Fayetteville, AR 72701
United States

Josh B. McGee

Manhattan Institute for Policy Research ( email )

52 Vanderbilt Ave.
New York, NY 10017
United States

Laura and John Arnold Foundation ( email )

2800 Post Oak Blvd
Ste. 225.
Houston, TX 77056-8809
United States

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