Who Benefits from Pension Enhancements?

During the late 1990s public pension funds across the United States accrued large actuarial surpluses. The seemingly flush conditions of the pension funds led legislators in most states to substantially improve retirement benefits for public workers, including teachers. In this study we examine the benefit enhancements to the teacher pension system in Missouri. The enhancements resulted in large windfall gains for teachers who were close to retirement when the legislation was enacted. By contrast, novice teachers, and teachers who had not yet entered the labor force, were made worse off. The reason is that front-end contribution rates have been raised for current teachers to offset past liabilities accrued from the enhancements. Total teacher retirement compensation, net of contribution costs, is lower for young teachers today as a result of the enhancement legislation. Given sharp increases in pension costs in other states, this finding may generalize to young teachers in many other plans. Cory Koedel (corresponding author) Truman School of Public Affairs and Department of Economics University of Missouri Columbia, MO 65211 [email protected] Shawn Ni Department of Economics University of Missouri Columbia, MO 65211 [email protected] Michael Podgursky Department of Economics University of Missouri Columbia, MO 65211 [email protected] doi:10.1162/EDFP_a_00128 © 2014 Association for Education Finance and Policy 165 PENSION ENHANCEMENTS