Sins of the Past, Present, and Future: Alternative Pension Funding Policies

August 2020

Our goal in this paper, presented at the 2020 Brookings Municipal Finance Conference, is to better understand teacher pension funding dynamics with a focus on sustainability and intergenerational equity. The origin of this paper is our analysis of the funding policy recommended in a highly publicized paper first presented at the 2019 Brookings Municipal Finance Conference (Lenney, Lutz, and Sheiner, 2019a; 2019b). That proposed policy aims to alleviate rising pension payments that crowd-out classroom expenditures and teacher salaries by abandoning the attempt to pay down pension debt. While the problem of crowd-out is real, we show that, with uncertain investment returns, the recommended policy would carry significant risk of pension fund insolvency and a jump in contributions to the pay-go rate, which is much higher than current rates. We close by proposing a policy evaluation framework that better incorporates risk and the intertemporal tradeoffs between current contributions and likely future outcomes. We illustrate throughout with data from the California Teachers Retirement System (CalSTRS).

Keywords

pension finance

Education level

K-12 Education

Topics

Staffing, Finance, and Operations