Cross-Subsidization in Teacher Pension Benefits: Examining Rates of Return Among School Districts

Abstract

When pension benefits are not directly tied to contributions, some individuals may earn disproportionate returns on their retirement contributions. For instance, individuals who receive relatively larger late-career raises will receive disproportionately greater returns. For teachers, whose salaries are determined by salary schedules set by districts, these differences may be nonrandom, with larger raises accruing to teachers in more advantaged school districts. Using salary schedules from 490 school districts, the authors estimate the rate of return on contributions for each district. They then analyze the relationship between district characteristics and the rate of return. They find that the rate of return varies markedly among school districts, with larger and generally more affluent school districts benefiting. These findings demonstrate how salary structures and current pension design lead to cross-subsidization of pension benefits among school districts.