How Much do Teachers Value Compensation Deferred for Retirement? Evidence from Defined Contribution Rate Choices

How much do teachers value compensation deferred for retirement (CDR)? This question is important because the vast majority of public school teachers are covered by defined benefit (DB) pension plans that “backload” a large share of compensation to retirement relative to the compensation structure in the private sector, and there is scant evidence about whether pension structures are consistent with teacher preferences for current compensation versus CDR. This study examines a unique setting in Washington State, where teachers are enrolled in a hybrid pension system that has both DB and defined contribution (DC) components. We exploit the fact that teachers have choices over their DC contribution rate to infer their revealed preferences for current versus CDR. We find that teachers on average contribute 7.23 percent of salary income toward retirement; 62 percent in fact elect to contribute more than the minimally required contribution of 5 percent. This suggests that teachers value CDR far more than suggested by prior evidence.

Working paper 242-0920 was originally released in September 2020 under the title "How Much do Teachers Value Deferred Compensation? Evidence from Defined Contribution Rate Choices". This is an updated version, released April 2021.