"Pension wealth" refers to the accumulated savings or investment value that a person has set aside for their retirement. It represents the financial resources they have built up over time to support themselves when they stop working.
Full definition
We then show that this back loading produces very large losses
in pension wealth for mobile teachers.
Because the composite effect of each system is hard to discern by simply looking at the benefit formula, we examine patterns
of pension wealth accumulation by age of separation.
As the table also shows, these losses are large in relative terms as well, ranging from 41 percent to 74 percent of
net pension wealth for teachers who stay.
This inequality in benefits produces very large losses in
pension wealth for mobile teachers.
The bottom curve shows that under 1975 rules a teacher entering at age 25 would have accrued just under $ 400,000 in
pension wealth by age 55.
Each year, an educator would
accrue pension wealth in a smooth and transparent way, providing a steady addition to the annual salary she is earning.
In fact, this graph presents the level of
pension wealth at any point in a representative teacher's career as a percent of cumulative earnings up to that year.
Teaching professionals who move from one state to another in the course of a teaching career would not suffer devastating losses in
pension wealth as they do in the current system.
The relative magnitude of
expected pension wealth differs sharply between the plans depending on when a teacher anticipates exiting the position, and the magnitude of anticipated returns to investment.
As the authors calculate, teachers who were already well into their teaching career received benefit increases of over $ 100,000 in
estimated pension wealth.
If the reduction in
pension wealth from working an additional year exceeds the teacher's take - home pay, her total compensation is negative and she is paying for the privilege of teaching.
The result of these complex pension rules is that teachers who leave the profession in their 50s receive
more pension wealth (as a percentage of cumulative earnings) than those who separate earlier.
Early in a teacher's career, the value of the contributions will far
exceed pension wealth, whereas for more senior teachers, the reverse is true.
In the chart below, the hypothetical teacher who enters teaching at age 25 gains over $ 100,000 in
future pension wealth at age 50, 55, and 60.
Then, following a final bump in the benefit formula's generosity at 31 years of service (age 56), net
pension wealth starts shrinking.
In our view, a teacher who works 10 years or 30 years should accrue
pension wealth roughly equivalent to total pension contributions (with accumulated returns).
Her
gross pension wealth is zero (and therefore the change from year - to - year during this period is zero).
The current pension structure «pushes» teachers out of the system by
decreasing pension wealth for every additional year a teacher chooses to stay in the classroom beyond normal retirement.
To provide the same transparency for teachers, plans should not only disclose the projected annual pension payment, they should also
report pension wealth.
Studies to date, while few in number, find no positive effects on workforce quality of back -
loading pension wealth.
In fact, the average woman's total
pension wealth only begins to catch up to her male colleagues if she lives to collect benefits well into her 80s and 90s.
In this fashion, we can calculate weighted averages of
net pension wealth for winners, losers, and the whole cohort of 25 - year - old entrants.
In our view, a teacher who works ten years or thirty years should
accrue pension wealth roughly equivalent to total pension contributions (with accumulated returns).
The accumulation
of pension wealth is not smooth and steady, but rises with fits and starts, due to rules of eligibility for early retirement and the like.
Nor should an additional year of work
reduce pension wealth, as is the case in current pension plans after a certain point in time, often at relatively young ages.
To appreciate these incentives, it is necessary to understand the pattern of a teacher's
pension wealth accumulation over the course of her career.
Once a teacher is beyond the spike and
pension wealth starts shrinking, the system is effectively pushing her into retirement.
The paper shows that this back loading produces very large losses in
pension wealth for mobile teachers.
Some years (e.g., at 25 or 30 years of service) yield increases
in pension wealth that are several times the teacher's salary.
As is evident, complex pension rules lead to
pension wealth curves that are irregularly shaped and bear no resemblance to the smoothly growing cumulative value of contributions.
Estimates show teachers who split a thirty - year career between two pension plans often lose over half their net
pension wealth compared to teachers who complete a career in a single system.
New research from the Urban Institute compares the value of a teacher's contributions to a teacher's
overall pension wealth.
[1] Morrissey states that Figure 1 is «misleading» because it compares gross
pension wealth with the sum of employer and employee contributions.
Seniority rights are a big deal right now because older teachers have a lot to lose: higher salaries that they've reached after a lifetime of anemic ones; and significant
pension wealth if they make it to retirement.