The costs of retiree benefits for educators, including “legacy” costs from unfunded benefits for previous retirees, consume a large and growing share of public spending on K–12 education. Between 2004 and 2012, data on fringe benefits from the Bureau of Labor Statistics show that pension costs for public educators rose from 11.9 to 16.7 percent of salaries. In contrast, pension costs for professionals in private firms were relatively flat, at about 10 percent of salaries, over the same period. These gaps are likely to continue to widen as states and school districts attempt to pay down large unfunded liabilities in educators’ defined benefit (DB) pension plans. Using estimates from the pension funds themselves, the Pew Center on the States estimates that the unfunded liabilities of state and local governments for retirement benefits total roughly $1 trillion. (About half of that is school-related, since K–12 workers represent about half of state and local employment.) That trillion-dollar number, as vast as it seems, understates the seriousness of the situation. Most economists agree that the official calculations greatly underestimate the true liabilities. Estimates of the unfunded liabilities more than double if similar calculations are performed using standard methods in financial economics. (more...)
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