Occupy Wall Street protesters recently released "The 99 Percent Declaration," a list of bullet points that lays out their policy preferences. One goal caught our attention: "paying our teachers a competitive salary commensurate with the salaries of employees in the private sector with similar skills."
We could not agree more. The implication of the protesters' demand, however, is that teachers are paid far too little given their skills. The opposite is actually true: According to our analysis of salaries, fringe benefits and job security, most public school teachers are paid considerably more than what they could earn in private-sector jobs. Perhaps that explains why so few teachers have made the leap.
In the longer term, states and localities should give public schools greater flexibility in setting teacher pay.
On average, teachers who leave for the private sector take a small salary cut, based on our analysis of Census Bureau data. Private-sector workers who shift into teaching typically get a salary increase. Based on these findings and other supporting data, our best estimate is that teacher salaries are about equal with similarly skilled private employees.
Fringe benefits, however, are not equal. Compare pensions for full-career teachers retiring today to what they might receive in a private sector 401(k) plan, and the difference is startling.
By the numbers
Imagine a teacher who retired today after 30 years service with a final salary of $80,000 a year. The typical pension contribution is about 5.1% of pay, according to the Public Plans Database, and the typical benefit after 30 years would be about 54% of final pay. That's about $40,660 per year, in this case, and it's guaranteed — no matter what happens with the stock market or the economy. In addition, most teachers are eligible for retiree health coverage, which can be worth thousands of dollars a year. Retiree medical insurance is less common and less generous for private-sector workers.
Now consider what the same teacher might receive in a private-sector 401(k) plan. Let's assume a 5% employee contribution with a 5% employer match, which is typical for larger employers. To match the guaranteed nature of public pension benefits, the teacher's 401(k) must invest in U.S. Treasury bonds, yielding about 4% annually. At retirement, her account balance would equal $183,106, enough to provide a steady lifetime income of just $7,272 per year. Therefore, assuming equal employee contributions, a full-career teacher can expect retirement benefits over four times higher than a similar private-sector worker.
Not every teacher does so well. For teachers who quit after only a few years, a 401(k) would actually be a better deal. But total teacher benefits — including retirement, health coverage, paid time off and other fringe benefits — are roughly double those generally paid by private-sector firms. These generous benefits, plus job security that cuts unemployment risk in half compared with white-collar workers in the private sector, leads to teachers collecting about $1.50 in compensation for every dollar they would earn in the private sector.
Workers have responded by applying for teaching jobs in large numbers. Teacher colleges regularly graduate thousands more students than can possibly find teaching jobs. One wouldn't think that "underpaid" positions would receive this kind of interest.
The policy arena
The teacher compensation premium carries both short- and longer-term policy implications. The most immediate is that the mild reductions in teacher benefits currently contemplated in many states would not lead to an exodus of teachers. Their overall compensation package would remain well above market levels.
In the longer term, states and localities should give public schools greater flexibility in setting teacher pay. The most effective teachers may require present, or perhaps even higher, levels of compensation. But the first step toward any pay reform is acknowledging a simple fact: The average public school teacher is not underpaid.
Andrew G. Biggs is a resident scholar at AEI, and Jason Richwine is a senior policy analyst at the Heritage Foundation