Dollars and Jens
Thursday, January 13, 2011
For a number of reasons, workers' best protection against employer abuses is the ability to threaten to leave. Perhaps this is part of the reason large employers and labor unions introduced defined-benefit retirement packages; it provides a large pecuniary barrier to employees' leaving, and thus empowers the unions and the employers at the workers' expense. The pension benefit that accrues to young workers is very, very small; if an employee leaves the employer, even after 15 years, he gets very little value from the retirement plan; on the other hand, the employee deciding between leaving after 24 years and leaving at 25 years may find that his benefits accrue quite rapidly in that extra year, and will want to stick around. Almost the only value to the 15 year employee is that, if he sticks around a few more years, he will be able to earn these large non-wage benefits as well.

Defined-benefit plans don't have to be that way; in practice, though, they almost always are (where "almost" is me being overly cautious, and not an indicator that I have any reason to believe that there is an exception). I just came across a nice graph for the teacher pension in Missouri. In this case, a teacher in his 23rd year (or thereabouts) gets $200,000 in pension value in one year.

As Joel Klein pointed out in an op-ed in the WSJ, this means a lot of money is being spent that is not going to new teachers, making it harder to recruit the best new teachers. This is on top of the teacher mobility issue, and there is evidence of substantial gains made from moving teachers from one place to another; while there appear to be good and bad schools, and good and bad teachers, it also appears that teachers will generally match up better with some schools than others, such that switching a teacher at one school with a teacher at another school can improve both teachers' results.

While much of the recent antagonism toward defined-benefit plans for state employees has been focussed on the uncertainty that this creates for state budgets or the ability it gives to politicians to hide implicit debts, it should also be noted that many problems are caused by the way in which benefits accrue, which, even if they might sometimes serve the narrow interests of the state-as-employer, are detrimental to the state's economy and polity.

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