Later Retirement Doesn’t Harm School Districts’ Payroll Costs

National Education Association of Rhode Island President Larry Purtill is gaining some traction with his claim that having teachers retire later will hit local communities in the payroll. As described in an October 25 Providence Journal story by Kathrine Gregg (not online):

Sen. Walter Felag, D-Warren, asked the question that Larry Purtill, president of the National Education Association of Rhode Island, has asked on YouTube and elsewhere: how will city and town taxpayers be able to afford all of the top-scale teachers who would now be forced to work until they are 67 years old?

A top-step teacher averages $70,764 a year in Rhode Island; a first-year teacher averages $39,087, according to Purtill.

Purtill has not yet had his turn to testify before the legislators, but in other venues he argues: “If a teacher is forced to go from 62 to 67 to retire and would have been replaced by someone on Step 1, that is an additional $130,479 for one teacher over that five-year period. Has anyone thought about this, and figured it into the actuarial studies? I am assuming that unless state aid increases by a drastic amount, this cost will go directly to the cities and towns.”

There’s a reason Purtill stops his cost clock at five years: because after that point, the older teacher retires and a replacement is hired at step one. Obviously, that teacher will be making less, to start with, than a teacher hired five years earlier, so the scenario of a later retirement actually begins to save the district money. And the district continues to save money for the ten years it takes the new teacher to reach step ten, herself.

To put a number on this dynamic, I averaged all of the salary steps compiled by the Rhode Island Association of School Committees for the 2011/2012 school year. For easier comparison, I then removed the few districts that spread their steps over more than ten years, leaving me with 14 cities and towns. (To check for any distortion, I compared these districts to the broader average available for 2010/2011 and found them to be about 0.1% higher, overall.) Using these averages, I figured out the year-to-year step raises and factored in the 4% increase that the pension actuaries estimate that the overall step system receives each year, on average (inflation plus general increase). By this method, I found step one to be $39,175 and step ten to be $72,393.

It is true that a local district will therefore pay an extra $141,475 for five more years of the older teacher’s salary, compared with a replacement starting at step one. However, seven years after the delayed retirement, the savings in waiting to hire her replacement have erased the extra costs. By the time the later replacement reaches step ten, the district turns out to have saved $44,990, and that number holds for decades, until the year that the earlier replacement would have retired.

Remember that this is savings to the district on salary alone. Most districts offer retirees some sort of health benefit, which will erode the initial salary savings of earlier retirement. What’s more, a good number of districts only pay retiree healthcare until Medicare age, so pushing retirement beyond that point would eliminate the healthcare portion of districts’ other post-employment benefits (OPEB) liability completely.

An important note arises if we expand the inquiry to figure out the cost/savings of later retirement in terms of the older teacher’s pension. Such an analysis is difficult to perform, because changes to the retirement system over time have left a number of categories into which employees can fall; moreover, teachers can retire at various ages, with varying years of service, so an accurate comparison would require teacher-by-teacher analysis.

For illustration purposes, however, I assumed normal retirement at age 62 with 29 years of service on a non-grandfathered Schedule A. (That means the teacher receives the more generous percentage of pay that Schedule A provides but has the retirement benefit calculated as an average of his or her highest five years, not three years, as would be the case for a grandfathered Schedule A pension.) For the second scenario, I added five years to this teacher’s career, but followed the proposed pension reform such that the teacher only accrues an additional 1% of salary for each additional year of work. I did factor in cost of living increases for both scenarios, but I used the reformed rate, which ties increases to pension fund performance.

The upshot is that the later retirement saves the retirement system about $54,000 over the life of an individual teacher. But those savings only materialize under the terms of the proposed reform. Applying a later retirement to the current system, without other reforms, winds up costing money in the scenario I’ve described, because the starting pension rate and higher cost of living adjustments (COLAs) increase the total benefit by so much.

Whatever the case, under the current system, the teacher is working for 29 years and retiring for 25. Under the reform, he or she is working for 34 and retiring for 20. Put differently, under the current system (with all of my assumptions), the older teacher will be collecting retirement for almost the entire career of his or her replacement. Essentially, for just four years will the system be paying for only one teacher for one teaching job. Under the reform plan, that differential increases almost fourfold, leaving fifteen years of the replacement’s career unburdened by pension costs for the older teacher.

One needn’t run the numbers to get a sense of just how quickly Rhode Island and its cities and towns — collectively and individually — will save money.