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If a rational system of teacher compensation, aimed at recruiting and retaining high-quality teachers, were designed from scratch, it is unlikely it would bear any resemblance to the system that is currently in place. In this paper, the author takes a deep look into how the method of paying teachers evolved. He shows that compensation systems have unintentionally become dysfunctional. He shows how efficiencies can be gained through rethinking decisions such as how many teachers a district actually needs. [An extensive list of resources is included.]

While it is generally understood that defined benefit pension systems concentrate benefits on career teachers and impose costs on mobile teachers, there has been very little analysis of the magnitude of these effects. The authors develop a measure of implicit redistribution of pension wealth among teachers at varying ages of separation. Compared to a neutral system, often about half of an entering cohort's net pension wealth is redistributed to teachers who separate in their fifties from those who separate earlier. There is some variation across six state systems. This implies large costs for interstate mobility. Estimates show teachers who split a thirty-year career between two pension plans often lose over half their net pension wealth compared to teachers who complete a career in a single system. Plan options that permit purchases of service years mitigate few or none of these losses. It is difficult to explain these patterns of costs and benefits on efficiency grounds. More likely explanations include the relative influence of senior versus junior educators in interest group politics and a coordination problem between states. (Contains 7 tables, 16 figures, and 40 footnotes.)

Many states are struggling to finance under-funded teacher pension systems as well as recruit and retain a high-quality teaching workforce. This paper compares Maryland's former (prior to Spring, 2006) teacher pension system to those in Pennsylvania and several other states. On the basis of simple replacement rates, the former Maryland state plan was the lowest in the nation. However, this comparison ignores other important facets of state plans: (1) Maryland teachers are in the federal Social Security system, while teachers in many other states are not; (2) Teacher contribution rate in Maryland was very low relative to other states, which may be attractive for young teachers; (3) Cost-of-living adjustment in Maryland is more generous and reliable than in many other states; (4) Compared to other states, the Maryland system provided more income up front and less in later years; and (5) Evidence from teacher labor market data does not suggest that teacher retention or quality is worse in Maryland than in Pennsylvania. The author concludes that increased state spending on defined benefit pension plans is unlikely to be a cost-efficient way to staff classrooms with qualified teachers. Given the high mobility of public school teachers, the author advocates providing teachers with a defined contribution alternative to the current system, a plan that would "travel with" mobile teachers similar to plans that predominate in professional labor markets in the private sector and in higher education. Regression Analysis of Teacher Turnover is appended. (Contains 12 endnotes, 3 figures, and 3 tables.) [This report was published in cooperation with the Maryland Public Policy Institute.]