Official Education Spending Figures Do Not Incorporate Full Cost of Teacher Pensions
By Jason Richwine, Ph.D.
March 25, 2013
Despite the centrality of pensions in debates over government budgeting and education policy, the federal government dramatically underestimates teacher pension costs in its official education spending figures. States report to the federal government only the yearly contributions to teacher pension funds rather than the present value of accrued benefits. Since states and local school districts routinely contribute less to their pension funds than is needed to cover future benefits, correcting this accounting problem could add tens of billions of dollars—somewhere around $1,000 per pupil—to official education spending estimates. The federal government should revise its data collection procedures to require proper accounting of teacher pension costs, giving taxpayers a more accurate picture of education expenditures.
The cost of pensions for public school teachers is a major focus of debates over education spending. In Wisconsin, for example, Democrats strongly opposed reforms championed by Governor Scott Walker (R) that prevented teachers and other public employees from collectively bargaining over pensions. In Florida, teachers filed a lawsuit in response to a new requirement that state employees contribute 3 percent of their salary to their pension plan, which had been funded exclusively by taxpayers. Part of the intense media coverage of the recent teacher strike in Chicago was the fact that the city—instead of teachers themselves—paid most of the “employee contribution” to the teacher pension fund.
Despite the prominence of pensions in these debates, however, the federal government dramatically undercounts the cost of teacher pensions in its official education spending estimates, which include the widely cited per-pupil spending figures. This undercounting occurs because the National Center for Education Statistics (NCES), a division of the U.S. Department of Education, allows states to define teacher pension costs as whatever school districts happen to contribute to their pension funds each year. Because governments frequently underfund their pensions, the contribution does not reflect the true costs of their pensions. The correct accounting, which is embraced by other federal agencies and virtually all economists, measures pension costs based on the present value of future pension benefits that teachers have accrued.
Using proper accounting, teacher pension costs are several times higher than the amount recorded in NCES estimates. Although exact figures are not available, making this correction adds somewhere around $1,000 to the current per-pupil spending estimates. The NCES should revise its data collection procedures to require proper accounting of teacher pension costs, giving taxpayers a more accurate picture of education expenditures.