AEFP Annual Meetings Boston, MA March 15-17, 2012 Cory Koedel , University of Missouri
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Invisible Windfall: The Distribution of Pension Wealth Enhancements During the 1990’s and Their Long-Run Consequences AEFP Annual Meetings Boston, MA March 15-17, 2012 Cory Koedel, University of Missouri Shawn Ni, University of Missouri Michael Podgursky, University of Missouri & GWBI Fellow 1
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Invisible Windfall: The Distribution of Pension Wealth Enhancements During the 1990’s and Their Long-Run Consequences. AEFP Annual Meetings Boston, MA March 15-17, 2012 Cory Koedel , University of Missouri Shawn Ni, University of Missouri - PowerPoint PPT Presentation
Transcript of AEFP Annual Meetings Boston, MA March 15-17, 2012 Cory Koedel , University of Missouri
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Invisible Windfall:The Distribution of Pension Wealth Enhancements
During the 1990’s and Their Long-Run Consequences
AEFP Annual MeetingsBoston, MAMarch 15-17, 2012
Cory Koedel, University of MissouriShawn Ni, University of MissouriMichael Podgursky, University of Missouri & GWBI Fellow
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Invisible Windfall
• Like many other states, Missouri enacted large enhancements to teacher pension benefits during 1990’s
• Little analysis of the effects of these enhancements in any state• Large windfall ($2.4b) and very unequally distributed.• Experienced teachers had large windfall gains. Net benefits for
young teachers much smaller and possibly negative.• Benefits favored higher SES and low minority schools• Peculiar structure of gains and elastic behavioral response of
teachers likely to make ultimate costs much larger than anticipated (“peak value” to “peak plateau”)
• Teacher quality effects probably small and possibly negative
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Invisible Windfall
• Like many other states, Missouri enacted large enhancements to teacher pension benefits during 1990’s
• Little analysis of the effects of these enhancements in any state• Large windfall ($2.4b) and very unequally distributed.• Experienced teachers had large windfall gains. Net benefits for
young teachers much smaller and possibly negative.• Benefits favored higher SES and low minority schools• Peculiar structure of gains and elastic behavioral response of
teachers likely to make ultimate costs much larger than anticipated (“peak value” to “peak plateau”)
• Teacher quality effects probably small and possibly negative
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PSRS1995
Formula factor 0.023, early retirement by 55-25 rule, COLA cap 65 percent
1996 Implement unrestricted “25 and out”
1997 COLA cap increased from 65 to 75 percent
1998 1999 Formula factor raised to 0.025 for full retirement (with corresponding upward
adjustments for early retirement)
2000 Implement Rule of 80, FAS changed to highest three years of salary
2001 COLA cap increased to 80 percent
2002 Formula factor increased to 0.0255 if YOS ≥ 31 (new factor applies to all service years for eligible individuals)
Table 1. Key Parameters of the Missouri Pension System, 1995 – 2002 (there were no changes after 2002). Initial Parameters as of 1995 are Reported in Row 1.
Key Enhancements
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Educators in public schools in the United States are nearly universally enrolled in defined benefit pension plans. Most plans are administered at the state level and share a common structure. The following formula is used to determine the annual benefit:
Final Average Salary DB pensions:
F = formula factor, YOS = years of service, FAS = final average salaryNote: Missouri teachers (PSRS) are not covered by Social Security
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For each teacher the present discounted value (PDV) of pension wealth at time s, with collection starting at time j where j ≥ s, can be calculated as:
|* *T
t st t s
t j
Y P d
|* *T
t st t s
t j
Y P d
Pension Wealth
Real interest rate = 4%, Inflation Rate = 3%Salary growth modeled on MO data
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Life Cycle Pension Wealth Accrual for Typical Teacher:1995 Rules
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1996 Rules
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1999 Rules
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2000 Rules
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2002 Rules
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How Big Were the Gains?
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2006 2009Total K-12 Enrollment† 781,000 792,000 801,000 809,000 813,000 811,000 814,000 814,000 817,000 827,000 831,000Teachers 49,491 51,125 52,923 54,504 55,943 57,400 58,256 58,926 59,699 60,904 63,411Avg. Age 41.3 41.3 41.3 41.2 41.2 41.1 41.0 41.0 41.1 41.1 41.0Avg. Experience 13.2 13.1 12.9 12.7 12.5 12.3 12.0 11.9 11.9 11.8 11.5 Avg. Current PW ($) 91,387 104,300 107,012 109,080 120,071 127,348 124,628 126,078 127,256 121,643 118,439Counterfactual (1995) N/A 94,376 95,566 97,527 98,868 97,786 95,224 96,093 97,740 94,971 93,876Difference -- 9,924 11,446 11,533 21,203 28,203 29,404 29,985 29,516 26,672 24,563 Avg. Peak-Value PW ($) 280,867 284,146 289,200 291,923 319,167 331,929 332,155 337,180 339,034 329,965 340,489Counterfactual (1995) N/A 284,146 285,720 288,407 290,111 286,873 285,583 289,512 291,118 283,370 292,410Difference --- 0 3,480 3,516 29,056 45,056 46,572 47,668 47,916 46,595 48,079 Avg. Expected PW ($) 207,108 244,086Counterfactual (1995) N/A 206,329Difference --- 37,757 Teacher Contribution (% of Earnings)
10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 11.5 13.0
Total Enhancement Value – Current PW ($ Millions) N/A 507 606 630 1,186 1,697 1,713 1,767 1,762
1,624
1,558
Total Enhancement Value – Peak Value PW ($ Millions) N/A 0 184 192 1,625 2,586 2,713 2,809 2,861
2,838
3,049
Total Enhancement Value – Expected PW ($ Millions)
2,394
Table 2. Summary of Pension-Enhancement Effects in Missouri. Counterfactual Pension Wealth Computed Using 1995 Pension Parameters. 2009 Dollars.
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2006 2009Total K-12 Enrollment† 781,000 792,000 801,000 809,000 813,000 811,000 814,000 814,000 817,000 827,000 831,000Teachers 49,491 51,125 52,923 54,504 55,943 57,400 58,256 58,926 59,699 60,904 63,411Avg. Age 41.3 41.3 41.3 41.2 41.2 41.1 41.0 41.0 41.1 41.1 41.0Avg. Experience 13.2 13.1 12.9 12.7 12.5 12.3 12.0 11.9 11.9 11.8 11.5 Avg. Current PW ($) 91,387 104,300 107,012 109,080 120,071 127,348 124,628 126,078 127,256 121,643 118,439Counterfactual (1995) N/A 94,376 95,566 97,527 98,868 97,786 95,224 96,093 97,740 94,971 93,876Difference -- 9,924 11,446 11,533 21,203 28,203 29,404 29,985 29,516 26,672 24,563 Avg. Peak-Value PW ($) 280,867 284,146 289,200 291,923 319,167 331,929 332,155 337,180 339,034 329,965 340,489Counterfactual (1995) N/A 284,146 285,720 288,407 290,111 286,873 285,583 289,512 291,118 283,370 292,410Difference --- 0 3,480 3,516 29,056 45,056 46,572 47,668 47,916 46,595 48,079 Avg. Expected PW ($) 207,108 244,086Counterfactual (1995) N/A 206,329Difference --- 37,757 Teacher Contribution (% of Earnings)
10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 11.5 13.0
Total Enhancement Value – Current PW ($ Millions) N/A 507 606 630 1,186 1,697 1,713 1,767 1,762
1,624
1,558
Total Enhancement Value – Peak Value PW ($ Millions) N/A 0 184 192 1,625 2,586 2,713 2,809 2,861
2,838
3,049
Total Enhancement Value – Expected PW ($ Millions)
2,394
Table 2. Summary of Pension-Enhancement Effects in Missouri. Counterfactual Pension Wealth Computed Using 1995 Pension Parameters. 2009 Dollars.
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2006 2009Total K-12 Enrollment† 781,000 792,000 801,000 809,000 813,000 811,000 814,000 814,000 817,000 827,000 831,000Teachers 49,491 51,125 52,923 54,504 55,943 57,400 58,256 58,926 59,699 60,904 63,411Avg. Age 41.3 41.3 41.3 41.2 41.2 41.1 41.0 41.0 41.1 41.1 41.0Avg. Experience 13.2 13.1 12.9 12.7 12.5 12.3 12.0 11.9 11.9 11.8 11.5 Avg. Current PW ($) 91,387 104,300 107,012 109,080 120,071 127,348 124,628 126,078 127,256 121,643 118,439Counterfactual (1995) N/A 94,376 95,566 97,527 98,868 97,786 95,224 96,093 97,740 94,971 93,876Difference -- 9,924 11,446 11,533 21,203 28,203 29,404 29,985 29,516 26,672 24,563 Avg. Peak-Value PW ($) 280,867 284,146 289,200 291,923 319,167 331,929 332,155 337,180 339,034 329,965 340,489Counterfactual (1995) N/A 284,146 285,720 288,407 290,111 286,873 285,583 289,512 291,118 283,370 292,410Difference --- 0 3,480 3,516 29,056 45,056 46,572 47,668 47,916 46,595 48,079 Avg. Expected PW ($) 207,108 244,086Counterfactual (1995) N/A 206,329Difference --- 37,757 Teacher Contribution (% of Earnings)
10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 11.5 13.0
Total Enhancement Value – Current PW ($ Millions) N/A 507 606 630 1,186 1,697 1,713 1,767 1,762
1,624
1,558Total Enhancement Value – Peak Value PW ($ Millions) N/A 0 184 192 1,625 2,586 2,713 2,809 2,861
2,838
3,049Total Enhancement Value – Expected PW ($ Millions)
2,394
Table 2. Summary of Pension-Enhancement Effects in Missouri. Counterfactual Pension Wealth Computed Using 1995 Pension Parameters. 2009 Dollars.
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2006 2009Total K-12 Enrollment† 781,000 792,000 801,000 809,000 813,000 811,000 814,000 814,000 817,000 827,000 831,000Teachers 49,491 51,125 52,923 54,504 55,943 57,400 58,256 58,926 59,699 60,904 63,411Avg. Age 41.3 41.3 41.3 41.2 41.2 41.1 41.0 41.0 41.1 41.1 41.0Avg. Experience 13.2 13.1 12.9 12.7 12.5 12.3 12.0 11.9 11.9 11.8 11.5 Avg. Current PW ($) 91,387 104,300 107,012 109,080 120,071 127,348 124,628 126,078 127,256 121,643 118,439Counterfactual (1995) N/A 94,376 95,566 97,527 98,868 97,786 95,224 96,093 97,740 94,971 93,876Difference -- 9,924 11,446 11,533 21,203 28,203 29,404 29,985 29,516 26,672 24,563 Avg. Peak-Value PW ($) 280,867 284,146 289,200 291,923 319,167 331,929 332,155 337,180 339,034 329,965 340,489Counterfactual (1995) N/A 284,146 285,720 288,407 290,111 286,873 285,583 289,512 291,118 283,370 292,410Difference --- 0 3,480 3,516 29,056 45,056 46,572 47,668 47,916 46,595 48,079 Avg. Expected PW ($) 207,108 244,086Counterfactual (1995) N/A 206,329Difference --- 37,757 Teacher Contribution (% of Earnings)
10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 11.5 13.0
Total Enhancement Value – Current PW ($ Millions) N/A 507 606 630 1,186 1,697 1,713 1,767 1,762
1,624
1,558
Total Enhancement Value – Peak Value PW ($ Millions) N/A 0 184 192 1,625 2,586 2,713 2,809 2,861
2,838
3,049
Total Enhancement Value – Expected PW ($ Millions)
2,394
Table 2. Summary of Pension-Enhancement Effects in Missouri. Counterfactual Pension Wealth Computed Using 1995 Pension Parameters. 2009 Dollars.
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How Were They Distributed?
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Avg. Pension-Wealth Gains Avg. Age Avg. ExperienceGains Decile (lowest to highest)
One 4,021 39.0 4.7Two 12,785 32.0 3.8Three 16,072 31.6 4.4Four 19,670 36.7 6.6Five 25,065 40.3 8.8Six 31,997 42.5 10.9Seven 40,994 44.0 13.6Eight 52,684 45.2 16.5Nine 69,761 47.9 20.6Ten 104,524 50.5 25.4
Table 3. Distribution of Enhancement-Driven Gains in Expected Pension Wealth Across the 2009 Teaching Workforce. Gains are Relative to Baseline Expected Pension Wealth Using the System Parameters and Exit Rates from the Pre-Enhancement Period. 2009 Dollars.
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Model A Model BStudent Share on Free/Reduced Lunch -146.4
(11.6)*-117.9(10.7)*
Urban Middle/High
-514.5
(1086.1) Suburb Elementary
3,958.2(956.1)*
Suburb Middle/High
1,593.8(962.0)
Rural Elementary
-5,396.8(756.1)*
Rural Middle/High
-6,263.9(789.7)*
Year 2009 2009R-Squared 0.01 0.03N 59,249 59,249
Table 6. Relation between Enhancement-Driven Gains in Expected Pension-Wealth and Teachers’ Schooling Environments in 2009.
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Expected Outcomes Peak-Value Outcomes Contribu
tionsPension Wealth
Net Pension Wealth
Contributions
Pension Wealth
Net Pension Wealth
Teacher Profile Pension Regime
Age
ExperiencePension
RulesExpected
Contributions
24 1 1995 10.5 37478 51457 13,614 84243 185161 10091824 1 Post-2002 14.5 53052 64055 12,094 113658 208970 95312
Difference: 15574 12598 -2976 29415 23809 -5606 Teacher Internalizes District Cost
24 1 1995 21.0 74956 51457 -23499 168488
185161 16673
24 1 Post-2002 29.0 106105 64055 -42050 227316 208970 -18346Difference: 31149 12598 -18551 58829 23809 -35020
Table 5. Projected Total Pension Wealth for a New Teacher in 2012 under Different Pension Regimes and Contribution Scenarios.
Entering teachers probably worse off
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Did they change teacher behavior?
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Teacher Turnover 1992-94 and 2006-08
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Conditional Distribution of Experience for Teachers Exiting With 20-40 Years Experience
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1993 2002 2007Mean Experience
27.1 27.6 26.4
Median Experience 28 29 28Mean Age 58.7 55.7 56.5Median Age 59 55 56
N 875 1612 1648
Experience and Age of Teacher Retirees: 1993, 2002, and 2007(Missouri )
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Conclusion
