Thursday, January 13, 2011

Pension Incentives

Joel Klein had a terrific op-Ed in the Wall Street Journal a few days ago about teacher pensions. In that essay, the former head of the NYC schools argues that hefty pensions distort incentives. First, the way we compensate teachers tends to be very back-loaded. We pay them low amounts of salary in the early years, and promise them pensions decades from now. That discourages some talented folks from entering the profession. These people might prefer more money now rather than later. Secondly, the pensions create a lock-in effect, a disincentive for teachers to leave the job in the later years. They might hang on to preserve or enhance pension benefits. Together, these two incentive effects from the way we compensate teachers may be lowering overall teacher quality considerably.

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