The following is posted with the permission of the author.
By John Sullivan
It’s always nice to see a fresh-faced 22-year-old begin a teaching career with eagerness, but is this happiness actually due to the fact that they have just entered an economic utopia where there is no concern about inflation, retirement, job loss, long hours, vacation time, job stress, health care and raises in income for doing exactly the same thing? Let’s look at what a teacher starting at $40,000 per year has to look forward to.
Assumptions:
- Beginning salary of $40,000 per year.
- Benefits of fifty cents per dollar of salary, including 15 paid sick days, 4 paid personal days, 6-10 paid.
- holidays, medical, dental, prescription, eyeglasses, disability insurance, life insurance, etc.
- Eight months of work per year. Three months off in the summer, two weeks off in the winter, two weeks off in the spring, five hours per day of class time and three hours per day of work outside of class.
- Healthcare rising at 6%/year – about twice the rate of inflation.
- Teacher salaries, including cost-of-living, rising at 6% per year.
- No access to Social Security or Medicare, nor any funding for these programs.
- Non-teachers receive Social Security and Medicare, pay for Social Security and Medicare, and pay for98% of any shortfalls in these programs. It is substantially a self-funded, pay-as-you-go system.
- Teacher pensions based upon 75% of ending salary and increasing at 3% per year.
- No raises for additional education.
- Life expectancy of 84 years.
- Cost of money of 5%.
Finally, the sense of entitlement on the part of teachers that, having worked one day, none of the conditions that are in effect on that day can ever be changed as long as they live.
$40,000 Starting salary $20,000 Benefits $60,000 Total for eight months of work $90,000 Annualized at 1.5 $47,130 Pension expense (Calculations follow) (1) $15,631 Expense for free healthcare in retirement. (Calculations follow) $152,761 Total compensation on an annualized basis (and 10% less than the King of Siam).How does this compare to a college graduate in the private sector who typically receives 25 cents per dollar of salary in benefits? Well, if his starting salary is $30,552 with benefits, his total compensation is $38,190 – exactly one-fourth of what a teacher starts at, and right around the median income($33,000) in this country. Guess what? He can actually be fired if he does a poor job! Guess what? He has to pay the teacher salaries out of that amount when he makes a fourth of what they do!
Guess what? It gets worse! At age 40, when total compensation for the teacher above is $329,651, the private sector counterpart gets $65,016 – a fifth of the teacher compensation. At age 60, when the teacher is retiring, total compensation for the teacher is $886,643 – 7.6 times what his counterpart in the private sector gets ($117,425). You see, in the private sector, people don’t get paid more in real wages for doing the same thing. They are lucky if they can keep up with 3% inflation. Guess what? It gets worse! Productivity improves every year in the private sector while student test scores have been declining for decades.
(1) In fairness, it is true that some teachers pay up to 9.4% of their salary into their pension plan. In this example, this would be $3760 of the $47,130. In many cases, the School Boards have kindly agreed to let the taxpayers reimburse the teachers who have their contribution deducted by increasing their gross pay. In any case, the overall teacher contributions to their pension plans are not significant.
Calculations follow.
Compensation
Age 22 $152,761 – calculations above.
Age 40 $329,651 – $90,000 increasing at 6% per year compounded for 18 years plus a $47,130 pension.
payment and a $15,631 payment for retirement healthcare.
Age 60 $886,643- $90,000 increasing at 6% per year compounded for 38 years plus a $47,130 pension.
payment and a $15,631 payment for retirement healthcare.
Salary
Age 22 $40,000
Age 40 $114,173 – $40,000 increasing at 6% compounded for 18 years.
Age 60 $366,170 – $40,000 increasing at 6% compounded for 38 years.
Pension
$274, 627 – beginning pension at 75% of final salary.
$542,000 – pension payment at age 84 with a 3% increase every year compounded.
$9,454,438 – total pension payments with a 3% increase every year for 24 years.
$5,076,422 – lump sum equivalent (income stream discounted back to age 60 at 5% cost of money).
$47,130 – annual payment needed getting a 5% rate of return for 38 years to have $5,384,993 at age 60 to fund the pension while still receiving a 5% rate of return throughout retirement.
Retirement healthcare
$65,911 – cost of health insurance at age 60 for a single person in 38 years. ($600/month today = $7200 increasing at 6% compounded for 38 years.) This is seriously understated since the cost of health insurance increases with age as well as time.
$266,869 – cost of health insurance at age 84.
$3,349,305 – total payments with 6% increase every year for 24 years.
$1,683,662 – lump sum equivalent (healthcare payments discounted back to age 60 at 5% cost of money).
$15,631 – annual payment needed getting a 5% rate of return for 38 years to have $1,683,662 at age 60 to fund the health insurance while still receiving a 5% rate of return throughout retirement.
Wow! No wonder why this 22-year-old teacher is so happy! He stands to receive $5,436,168 in salary and $2,718,084 in benefits over the next 38 years. Then, over the next 24 years, he will receive $9,454,438 in pension payments and $3,349,305 in health insurance for a total of $18,242,629 from various taxpayers. This is equivalent to an annuity of $294,236 per year for 62 years simply for working at the same part-time job. Even the King of Siam would be jealous!
But what of the School Board? Now, many of them are former teachers, but some of the others must be able to use a calculator. One would think that there is not a single taxpayer (or Jury) who would conclude that the School Board members, who have a fiduciary duty to act in the interests of the taxpayers and students, have done anything but act in the sole interests of the teachers.
Compensating teachers somewhere near their counterparts in the private sector would allow the Board to cut its $150,000,000 annual budget in half and lower property taxes at least 30%. Is there some reason why they should not?
John Sullivan is a financial analyst and adviser who lives in Palatine, Illinois. Click here to read more by Mr. Sullivan.
