Maria Fitzpatrick: "How Much Do Public School Teachers Value Their Retirement Benefits"

Maria Fitzpatrick

Searle Freedom Trust Postdoctoral Scholar

Public sector employees, like teachers, receive large fractions of their lifetime income in the form of deferred compensation, like defined benefit pensions, relative to their counterparts in the private sector. One explanation offered for the heavy use of deferred compensation in the public sector is that these packages attract high quality employees. The introduction of the opportunity provided in 1998 to Illinois public school employees to purchase additional pension benefits allows me to estimate employees' willingness-to-pay for retirement benefits relative to the cost of providing them. The results show that the majority of Illinois public school teachers are willing to pay just 17 cents for a dollar increase in the present value of expected retirement benefits.

As the public cost of deferred compensation exceeds its value to employees, the findings suggest substantial inefficiency in compensation and cast doubt on the ability of deferred compensation schemes to attract employees. Since the estimated demand and cost schedules suggest no public school employees value the deferred compensation as much as it costs to provide, I can also rule out models conclude union leadership is responsible for determining the generosity of deferred compensation. Finally, the results of this study suggest a Pareto-improving policy solution: governments can offer to buy back promised pension benefits for just a fraction of their expected present value.