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Fool’s Gold in Early-Retirement

Incentives

 

BY JAMES P. HOOVER

To cope with severely reduced operating revenue, school districts have turned to early-retirement incentive programs to accelerate attrition to reduce their personnel costs.

Most districts replace veteran employees who opt for early retirement with younger employees. These incentive plans assume future savings generated by replacing teachers at the top of the salary schedule with employees at beginning levels will fund the early-retirement program.

While the benefits to retirees are guaranteed, the anticipated savings are not. Retirement incentives usually result in an unfunded liability where the school district is responsible for the cost regardless of whether savings actually materialize. Any savings generated from a retirement incentive will end when the employee would have retired without an incentive.

Because these programs borrow future attrition by pushing teachers to retire early, school districts need to continually offer more attractive incentives to maintain normal attrition rates.

Most state retirement systems offer defined benefit programs. These provide a monthly benefit based on a formula that includes the teacher’s highest career salary and years of service. Teachers are encouraged to accrue years of service, get advanced degrees and assume extra duties to boost their salaries and “spike” their retirement benefit. Because benefits accrue through longevity, districts must provide more generous early-retirement incentives over time that can include large supplemental cash payments and health-care benefit guarantees.

Once a school district voluntarily offers an early-retirement incentive, the teachers’ unions will push to incorporate the benefit into their collective bargaining agreements. This will provide certainty for employees that a minimum incentive will be available regardless of the financial value to the district. When the district loses discretion over the election, scheduling and terms of an incentive offer, its efficacy will be substantially diminished. Teachers won’t hesitate to pass on the current incentive, realizing the incentive package will be offered multiple times during the life of the contract.

An early-retirement incentive must be offered to all employees meeting the specified age and service requirements. A large-scale exodus of teachers, particularly in disciplines with staffing shortages, may affect the quality of curriculum and instruction.

Indirect Costs
While new teachers may be hired at a lower salary, teacher turnover involves direct and indirect costs relating to recruiting and training replacements and the loss of skilled teachers with a track record of boosting student achievement. Credible studies by the National Commission on Teaching and America’s Future and the Texas Center for Educational Research suggest the costs associated with recruiting, hiring, processing, training and inducting new teachers, on top of the exit costs linked with the departing employee, can run as high as 30 percent of the departing teacher’s combined salary and benefits.

Extending health care benefits to retired employees until they reach age 65 has become the favored retirement incentive because it assures free or almost-free coverage until they are eligible for Medicare. Carrying retired employees contributes to higher costs due to increasing claims. In addition, the number of retired employees covered under a school district’s benefit plan increases the proportion of retired staff to active employees.

Because districts are unable to fully fund early-retirement incentive programs in the year they are offered, most use the “pay-as-you-go” approach. This model differs from a funded model used by typical pension plans where most costs are funded in advance during employees’ working years and invested until paid to retirees. The problem with the pay-as-you-go approach is that it results in the accumulation of enormous financial liabilities to pay future benefits.

A Future Burden
Early-retirement incentive plans place a financial strain on underfunded state pension plans by artificially swelling the number of beneficiaries in the system and ensuring higher employer pension contributions down the road.

Through the use of an accurate cost/benefit breakdown, the efficacies of these programs are revealed as highly suspect, with long-term consequences or hidden costs. Ultimately, the best early-retirement incentive is to ensure poorly performing teachers are not financially rewarded for staying in their jobs year after year. Someone who isn’t rewarded annually for simply showing up will have little incentive to delay retirement.

James Hoover is chief executive of the Pennsylvania Distance Learning Charter School in Sewickley, Pa. E-mail: james.hoover@padistance.com

 

 

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