Welcome to the Profit of Education website. Continuing the conversation begun in the book Profit of Education, we discuss the latest economic evidence on education reform.

Salaries and fringe benefits

Joel Klein, NYC school chancellor, took me to task for focusing yesterday’s post on salaries without discussing fringe benefits. Fair enough. Worse, this is after my wife (labor economist Shelly Lundberg) has bugged me for a year to pay more attention to the benefits side of the equation. Between the two of them, I’m now on board. Bringing benefits into the picture requires looking at two questions: Is the current way we divvy up compensation between salary and fringes the right way to do it, and are fringe benefits for teachers so ginormous as to vitiate the argument that total compensation is way too low?

As everyone knows, fringe benefits have been under enormous pressure in the private sector. In particular, the old-fashioned “defined benefit” pension has nearly disappeared. Klein tried to switch some of the money spent on teacher pensions into cash-in-the-hand salary, but the teachers union wouldn’t go along.

In addition to the general arguments in favor of keeping the salary/fringes ratio somewhat in line with the private sector, expensive defined benefit pensions have problematic incentives today in a way they didn’t in “the old days.” Back when people pretty much stuck to one employer for most of their career, it didn’t matter all that much whether pensions were defined benefit or defined contribution. Now it does. In a defined contribution plan, you earn pension benefits in line with current salary. In a defined benefit plan, your benefit accumulations are very heavily weighted toward the end of your career. Since the defined benefit plans (which almost all teachers have) aren’t worth much early in a career, they’re particularly ineffective in attracting young people into the profession.

The second point is that there is a perception that low teacher salaries are offset by incredibly good pension benefits. Not so. Teachers do get more expensive benefits than we see in the private sector, but the difference just isn’t all that large. The best numbers I can find are reported by Robert Costrell and Michael Podgursky in Education Next. Costrell and Podgursky calculate that in 2008 retirement benefits (pension plus social security) were 14.6 percent of salary for teachers versus 10.4 percent for private professionals. That’s clearly a big enough difference to deserve attention. Still, total teacher compensation is way too low.

Thanks to both Klein and my bride for the needed nudges.

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