Rethinking Teacher Compensation
A necessary next step
A 2010 study by McKinsey and Co. found that 100 percent of new teachers in the best-performing school systems in the world—Finland, Singapore, and South Korea—come from the top third of their college classes. In contrast, 77 percent of new U.S. teachers come from the bottom two-thirds of their college classes. Current teacher compensation practices in the United States contribute to this disparity.
How do we remedy this situation? We can attract top students to teaching, reward existing teachers, and garner stronger student test results not necessarily by increasing total pay in the face of shrinking budgets, but by reallocating compensation. Currently, teacher compensation is backloaded: Newer teachers receive meager salaries and benefits that balloon only near their careers' end. Therefore, starting salaries neither attract the highest academic performers to teaching nor keep newer teachers teaching. Rather, the current system encourages 20- or 25-year veterans to stay another five years.
Here's why. Nearly all states have defined benefit retirement plans that promise predetermined retirement benefits based on length of service, salary history, and age. Early in teachers' careers, they pay more into the fund than the value of the return, subsidizing late-career teachers whose pensions are growing far beyond what they and the state have invested annually. Pensions are typically based on a teacher's last few years of pay, and those larger numbers tip the scales dramatically.
This approach has several negatives. First, it is very expensive. With several years of stock market declines, rising teacher salaries, increasing health-care costs, and sweeteners which government added to retirement, teacher pension and benefits costs are soaring. In some cases, government contributes to teacher pensions at up to two or three times the rate of private-sector pension contributions.
Second, when financial markets decline, teacher pensions and benefits plans become jeopardized, as is the case today. With pension amounts growing, investment portfolios offering diminished returns, and revenues decreasing, states are confronting massive shortfalls between pension obligations and resources to pay them, estimated at more than $900 billion in at least one report. As a consequence, states are considering increased teacher contributions, decreased government contributions, lower payouts than promised, and increases in the number of years to retirement.
Third, today's pensions are not transportable: A teacher who moves from one state to another must join a different pension fund and suffer reduced retirement income. The same is true of career-changers who enter the system late. By retirement age their pensions often have less value than they and their employer have contributed.
Fourth, the incentives are all wrong for young people who are likely more interested in the immediate needs of housing, clothing, food, communications, and entertainment.
To attract stronger candidates to teaching, as well as address the pension system's difficulties, states should reallocate compensation toward the front end of a teacher's career. The McKinsey study found that a combination of marketing, free teacher education, and significant raises and bonuses could triple the proportion of new teachers coming from the top third of their college classes.
This means higher starting salaries and higher career salaries for top teachers. We must offer top secondary graduates scholarships or stipends to attract them to the teaching profession, and we must offer top teachers annual bonuses, just as in the private sector.
States also should shift their pension funds either to defined contribution plans, with pensions based on the amount of money contributed by the teacher and employer over a career, or to hybrid plans based on the cash value of the employer and teacher contributions. Such plans would be more transportable—good for career-changers—and would reduce the likelihood of changes in the size of contributions or payouts. Pension size, however, would not be guaranteed, but would depend on the market (as do most retirement funds).
With states experiencing deep deficits already, this is a challenging time for them to adopt new retirement policies. To address this, we suggest a pilot program to test the efficacy of this proposal in several diverse school districts, with funding support from the U.S. Department of Education and/or a consortium of foundations, with a design like Race to the Top.
Districts would apply with the support of a coalition consisting of the local teachers, the teachers' union, the school district, state government, and other key stakeholders. Funds would be used to invest in career incentives, and their impact on teacher recruitment and retention as well as on student achievement would be measured to provide evidence of their success.
To continue with a broken compensation system with few incentives for new teachers means losing the opportunity to bring more top candidates into our classrooms. That's a loss the next generation can ill afford.
Vol. 32, Issue 01, Pages 33, 36Published in Print: August 22, 2012, as Rethinking Teacher Compensation