Next, consider the consequences of the ubiquitous practice of paying the same for math and physical-education teachers. Given the other job opportunities for talented mathematicians—but not for phys-ed teachers—the same salary will attract many more of the latter than the former. It’s simple supply and demand. But when you’re short of qualified math teachers—as virtually every major urban school district is—poor kids with the greatest needs invariably get cheated, because most teachers prefer to teach highly motivated kids who live in safe communities, and whose parents will contribute private money to the school. The result: too few effective math and science teachers in high-poverty schools.
Finally, coming on top of these other senseless policies is the remarkable way that benefits and seniority drive overall teacher compensation. It’s possible for a teacher in New York City to retire at 55 and draw down an annual pension of more than $60,000, plus lifetime health benefits for herself and her family. The pension is not subject to New York State or local taxes and goes up with cost-of-living increases. The huge value of this lifetime stream of benefits is rarely mentioned when we talk about teachers’ compensation, but the teachers are well aware of it and act rationally in response to it. What we end up with is both a form of lock-in for employees and an enormous long-term financial exposure for the taxpayers.
The impact of the lock-in shapes the entire compensation system, because the “big” money comes only after a certain number of years—in New York City, for example, many teachers get their full pension after working 25 years, and a far smaller pension if they work for only 24 years. As a result of backloaded policies like this, after 10 years fewer than 1 percent of teachers leave the system, and after 15 years only about 0.1 percent leave. Many have candidly told me they are burned out, but they can’t afford to leave until their pension fully vests. So they go through the motions until they can retire with the total package.
Aggravating the perverse incentive of the benefit lock-in is the nature of almost all pay increases in public education, which are either automatic if you stay another year or so, or take 30 college credits; or across-the-board percentage raises—for example, 10 percent over three years, meaning that every veteran teacher making $80,000 gets an $8,000 increase, while every beginning teacher making $40,000 gets a $4,000 increase.
None of these pay increases makes sense. Why pay someone more for simply working another year or for taking a few courses? Starting last year, Mayor Bloomberg refused to give teachers in New York a raise, because he was facing budget cuts. But the overall pay for teachers still went up nearly 3.5 percent automatically, simply for longevity and college credits. (According to a Department of Education internal analysis, the average NYC teacher works fewer than seven hours a day for 185 days and costs the city $110,000—$71,000 in salary, $23,000 in pensions, and $16,000 in health and other benefits.) And why give all teachers making $80,000, or more, a 10 percent raise? They’re not going to leave, since they’re close to vesting their lifetime pensions. By contrast, increasing starting salaries by $8,000 (rather than $4,000) would help attract and retain better new teachers. But because of seniority, we can’t do it that way.
Now consider the financial burden that comes with providing lifetime benefits. Given the time between first putting aside the money to fund such a “long-tail exposure” and having to begin paying it, the amount “reserved” by the employer necessarily depends on a host of imprecise assumptions—about the rate of return that the money invested in the pension fund will earn, about how long employees will live, and even about how much overtime employees will work during their last few years, which is normally included in calculations of the amount of the pension. Each dollar set aside this year to cover the ultimate pension exposure must be taken from what would otherwise be current operating dollars.
Consequently, elected officials have had every incentive to make extraordinarily optimistic assumptions about the pension plan—or to simply underfund it—so they can put as little as possible into the reserve. Unfortunately, but predictably, that’s exactly what has happened: most states “assumed” they would get an average 8 percent return on their pension reserves, when in fact they were getting significantly less. Over the past 10 years, for example, New York City’s pension funds earned an average of just 2.5 percent. Now virtually every pension plan in America that covers teachers has huge unfunded liabilities. A recent study by the Manhattan Institute estimated the total current shortfall at close to $1 trillion. There’s only one way to pay for that: take the money from current and future operating budgets, robbing today’s children to pay tomorrow’s pensions. In NYC, for example, the portion of the overall budget set aside for education pensions went from $455 million in 2002 to $2.6 billion in 2011, most of it for teachers. Not surprisingly, retirees remain politically vigilant, and vote at much higher levels than active teachers in union elections (50 percent versus 24 percent in New York’s last UFT election).