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It’s a common story, one that Bay Area residents know particularly well. You got a shiny new iPhone late last year that can download all sorts of cool apps. But, since AT&T is your wireless carrier, you can’t actually complete a phone call. Want to switch to Verizon? Oops, there’s a nasty termination fee that could cost you up to $325.
It’s called a lock-in. Sometimes, to align longer-term interests, they make sense. Many companies offer employee stock options that can’t be exercised for a few years. And, organizations that make significant up-front investments in training don’t want employees immediately hitting the door with newly-gained skills. Each of these is a well-understood strategy for increasing both employee commitment and retention.
But, lock-ins can also breed complacency. You don’t need an economist to tell you that ending termination fees would cause an exodus of AT&T customers. And, since AT&T’s primary business strategy has been to lock its customers in — either through exclusive iPhone rights or punitive contracts — is it surprising that the service is so poor?
Unfortunately, most teacher pension plans take the lock-in strategy to an extreme.
Pensions are an exploding flashpoint in states across the country. For example, in Rhode Island, the State Treasurer, a Democrat, and the Governor, an Independent, have just called a special session to tackle the state’s immense pension woes. There, the state employee pension contribution has grown steadily from 5.6 percent of salaries in 2002 to approximately 23 percent in 2011, and it is projected to grow to 35 percent in 2013. Pension contributions, the fastest growing line-item in the state’s budget, have doubled, from $139 million in 2003 to $302 million in 2010. And, by 2013, when the state’s $75 million in Race to the Top funds are supposed to be transforming its education system, required pension contributions are expected to double again, to $615 million.
Often, battles around teacher compensation and benefits pit brand-new teachers against long-time veterans. But, that’s not always the case in pension systems. While research shows teachers’ effectiveness increases quickly in their first few years, research also finds little difference in effectiveness between a teacher with five years of experience and one with thirty. Yet, many pension systems don’t even allow teachers to vest until they’ve taught for ten years. It’s not just the first-year teacher, but also the 7th year teacher that is locked in. In this case, the early termination fee for leaving, or even moving to another state, equals tens of thousands of dollars in pension wealth.
And, the pension lock-ins continue for decades. For a teacher who passes the ten year mark, the 12th year of teaching is often worth much less than the 22nd year of teaching, which is worth less than the 26th year of teaching. Pension systems in Rhode Island and many other states highly reward some teachers, push others into premature retirement, penalize those who move, and are far from equitable, as teachers with similar abilities and responsibilities earn vastly different pensions.
Just as AT&T’s contract structure “rewards” customers that stay for two years and “encourages” customer retention, defenders of these pension designs say that the plans’ heavily back-loaded benefits and lock-ins encourage 7-year teachers to stay till their tenth year and 20-year teachers to stay into their next decade of teaching. Removing these elements, they fear, would lead to costly teacher turnover, decreasing the overall effectiveness of the teacher work force.
Perhaps they are right. But if so, we’re following the AT&T teacher retention strategy. Let’s stop relying on financial handcuffs and design teachers’ roles so they want to stay.
PS — There are no easy answers to pension dilemmas. Just as it was tempting to increase benefits in more prosperous times, states should act conscientiously and not swing too far in the other direction. Pushing educators into the same retirement insecurity that plagues many Americans is not the answer. Our recent paper, Better Benefits, describes these issues, as does a recent Raegen Miller paper from the Center for American Progress and a new paper from Fordham, too.