Everyone knows that public sector pensions are woefully underfunded, and growing more expensive over time. But a new paper suggests that not only are the costs high, but the benefits are relatively low as well. The study utilizes a change in policy in Illinois that allowed teachers to purchase more pension benefits in exchange for a one-time fee. This allowed the determination of how much teachers are willing to pay for marginal pension benefits. The authors found that on average, teachers valued each $1 in marginal pension benefits at $0.20.
This is useful information for two reasons. First, it suggests states may be able to save money and make teachers better off by buying back pension obligations in exchange for current lump sum payments. Second, it suggests that for districts looking to cut costs, decreases in benefits do not need to be offset with equal dollar value increases in current pay in order to maintain labor supply.
This also raises a question of why benefit levels are so high if teachers don’t value them that much? The author of the study offers a compelling explanation: because pension costs are hidden to current voters relative to salary costs. In other words, unions and administrators use expensive pensions instead of higher salaries because it keeps the cost hidden. These are all more reasons to move away from expensive pensions.