Wednesday, September 16, 2020

New Jersey's Wealth: Unequal Yet Mobile

Since the beginning of New Jersey's chronic fiscal crisis in the early-2000s, there's been an unending argument over raising taxes on high-earners to mitigate the budget crisis.  The argument over high-brackets exists in periods of New Jersey's growth, like in the mid-2010s and Phil Murphy's first three budget proposals, and in times of recession, like the Great Recession and today's Coronavirus Recession.  

There are some New Jerseyans who are flat-out conservative and believe creating high brackets is "punishing success" or that it would deter entrepreneurism, but the more significant argument is between moderates who oppose raising rates for pragmatic belief that high rates will induce millionaires to leave, and progressives, who insist taxes are marginal costs to already-rich people, that interstate moves are motivated by the lifestyle changes, weather, and family considerations, and that higher-brackets are necessary to reduce racial and social inequality.  

In tracking this argument, something I see as incomplete is its it's always framed as people leaving New Jersey, outmigrating from New Jersey, an "exodus from" New Jersey.  Chris Christie simply said, "tax them and they will leave."   This framing elides the other half of the equation, which is how do high-taxes affect the location decisions of businesses and people in other states who could have moved to New Jersey? 

Perhaps we don't consider "New Jersey Avoidance" because it's difficult to measure and is a non-event that doesn't generate headlines, but it's a phenomenon that can be inferred by how New Jersey's wealth, income, population, and jobs growth lag national averages.  

David Tepper's departure, Mercedes-Benz's departure, Honeywell's departure etc generated headlines, but no New Jersey newspaper is going to write a story about a pharmaceutical company opening a lab in Massachusetts, or a bank expanding in Salt Lake City, Dallas, Florida, or Nashville.  Yet these events in other states are important for understanding New Jersey's current economy because a generation ago, those firms would have expanded in New Jersey.  

Referring to the millionaire population of New Jersey, an historical examination of the IRS's Statistics of Income confirms that yes, New Jersey's millionaire population has seen apparently large growth (+214% since 2001), but that growth is nowhere near the national average (which was +330%) and is the fourth lowest in the US.   Thus, even if NJ's millionaire population grows, either through businesses not expanding here or individuals not wanted to relocate here, there is an avoidance effect happening that may be more significant than departures.

Income Inequality

The IRS Statistics of Income confirm that New Jersey's distribution of income is highly unequal.  

Of New Jersey's $426.8 billion in total income in 2018, $60.6 billion came from 22,420 returns of more than $1 million, and another $33.3 billion came from filers reporting income of $500,000-$1 million.  (See Note 1)

Thus, 22% of NJ's income is attached to only 1.6% of tax returns, and is even more concentrated among all residents, since the poorest-of-the-poor don't file tax returns.

To some people, that existence of inequality ends the argument: New Jersey must raise income taxes to reduce inequality.  Since New Jersey's wealthiest are presumably disproportionately white, and its poorest are disproportionately Black and Latino, that only increases the imperative to raise taxes on the wealthy. 

Since the revenue raised could pay for various desired services like teacher pensions, state-funded PreK, K-12 school aid, direct tax rebates, and build a rainy-day fund, raising taxes on the wealthy is a moral and fiscal absolute.

But moral absolutes are a funny thing, because not everyone's moral absolutes are the same.  Rich people who aren't persuaded that they must pay 10.75% of their income to the State of New Jersey don't need to stay here, nor are high-earning people contemplating a move to New Jersey obligated to come here.  Although the State of New Jersey is obligated to pay over $200 billion in debt, New Jerseyans as individuals aren't obligated to pay anything and don't need to stay here.

Phil Murphy has also said that "millionaire flight is a myth" and actively campaigns for higher income taxes, but his statements are sparse compared to the New Jersey Policy Perspective, an activist group based in Trenton.

The NJPP is a major proponent of raising taxes on the wealthy and has written multiple reports (or "reports") arguing that it's a "myth" that millionaire outmigration and that there's been an exodus of wealth from NJ.  

For instance, there's this 2016 piece "The 'Exodus' is More Like a Trickle" written by Sheila Reynertsen. 

Notice how Reynertsen, just like conservatives, frames the issue as people leaving NJ.  There is no contemplation of an avoidance effect.

Several rigorous statistical studies of interstate moving patterns confirm that there is no meaningful correlation between state taxes and interstate moves. For example, a new long-term study of top income-earners found that the vast majority of millionaires don’t move to avoid state taxes. Another study specifically looked at the impact of New Jersey’s 2004 enactment of a higher tax rate on incomes of more than $500,000 and concluded that “the effect of the new tax bracket is negligible overall. Even among the top 0.1 percent of income earners, the new tax did not appreciably increase out-migration.”

More importantly, the amount of new revenue gained from the tax change dwarfed the tax payments that would have been made by those few who left. The estimated revenue lost was less than 2 percent of the overall revenue gained. In other words, New Jersey did not lose money by increasing income tax rates on the wealthiest households.

The argument that the elderly, in particular, flee taxes by moving to lower-tax or no-tax states is also not supported by the empirical evidence. The patterns of state-to-state movement among the elderly have remained relatively consistent over time, even as state tax policies toward the elderly changed significantly across states. If older people who leave New Jersey are heading to popular retiree destinations regardless of tax policy, there is no reason to offer them tax breaks in the hopes that they will stay.

The NJPP's #1 piece of evidence that high-income outmigration is a "myth" is that despite New Jersey having multiple income tax increases in the last 20 years, the number of millionaires in New Jersey has grown, in raw numbers and as a percentage of the population.  

Corzine's Millionaire's Tax Took Place at the Time of a Recession, so the NJPP's Claim that Only Recessions Cause a Drop in High Income Residents is Statistically Unsupported.

So how can there be an outmigration problem if the population of rich people keeps growing?

The problem exists because New Jersey's economic growth is insufficient to relieve its budget disaster.  The evidence of a problem comes when you just apply inflation and look at other states.

$500,000 in 1994 = $800,000 in 2015.  Inflation isn't obscure, the NJPP ignores it.  

And the interstate comparison matters because every single state has had a huge increase in its million-earning population.  

The NJPP is a progressive information filtering service, not an objective think tank, and context is to be ignored, manipulated, and switched in the service of whatever progressive cause the NJPP is advocating for. When it suits the NJPP, they use nationwide and regional comparisons, but when interstate comparisons would undermine the progressive case, the NJPP refuses to. 

One of the Slowest Growth Rates for High-Income Tax Filings

The IRS's Statistics of Income does not go as far back as 1994, and it does not provide data on $500-$1 million earners and >$1 million earners for the years 2002-2009, but a comparison of 2001 and 2018 data reveals how much the growth of NJ's high-income population has lagged the nation's.

NJ Over $1 mil10,49922,440213.7%
NJ $500-$1 mil19,29049,700257.6%
US Over $1 mil193,798541,410279.4%
US $500-$1 mil358,0081,101,480307.7%

To put it another way:

Percentage of $1 million returns from NJ in 20015.42%
Percentage of $1 million returns from NJ in 20184.14%

Because if you look at the increase in the number of millionaires nationwide, NJ's increase has lagged the national average. New Jersey's population of $1 million earners only grew at 76.5% of the national rate.

This isn't proportional with NJ's low overall population growth rate. NJ's tax return growth was 93% of the national average for 2001-2018.

NJ's increase in people earning over $1 million was the fourth smallest in the US.

New Jersey's increase in people earning $500,000-$1,000,000 is the fifth smallest in the country.

It's true that NJ's overall population has grown very slowly, but NJ's share of the total population didn't show as large a lag against national growth.  In 2001, New Jerseyans had 3.1% of total tax returns in 2001 and 2.9% of total returns in 2018.  NJ's growth in overall population is in the bottom ten, but not 4th and 5th from last.

It is difficult to disentangle overall slow economic growth from low growth of high-income populations, but I think I think they are co-dependent.  I cannot prove how much of this effect is due to taxes, but other high-income tax states like New York and Connecticut have also seen slow growth, although, to be fair, Iowa, Minnesota, and California have gotten strong growth.  

I am not aware of polling of ultra-rich people on residential decisions, but there is a lot of evidence they are more fiscally conservative than non-rich people.  A large body of polling evidence shows regular people care about taxes as well.  A 2014 Monmouth University poll found that New Jerseyans who wanted to leave were much more motivated by cost of living and taxes than any other factor, with higher-income people more likely to say taxes.  Gallup has found that people in high-tax states were much more likely to want to leave than residents of moderate-tax and low-tax states (residents of moderate-tax states were not more likely to want to leave than residents of low-tax states).

Based on the conservativism of high-income people and polls of the general population, I think one can infer that high-income people can be intolerant of taxes enough to take taxes into account in their location decisions.

Can Income Migrate?

A secondary progressive claim is that income can only rarely leave a state.  

The vast majority of people actually don’t take their income with them to a new state – because they can’t. When people make an interstate move, they usually leave their job to take another, and the income they made in their previous job typically goes to the person who replaces them. That state income essentially stays put, which explains why New Jersey’s overall income reported each year grew significantly at the same time we “lost” that $18 billion.[17]

The same holds true for business owners if they leave the state. The money their business made goes to the new owner of the business if the old owner sold it, or other in-state businesses that pick up the customers of the one that left. If a doctor or a plumber or the owner of a restaurant leaves New Jersey, the patents and clients and customers don’t leave too.

For those moving out of state upon retirement, it is equally misleading to claim that New Jersey’s economy loses income equal to the person’s pre-retirement salary, because their income also would have declined if they had retired in New Jersey.

Partly true.  The vast majority of people can't take their income with them to a new state, but that doesn't mean the vast majority of income can't be moved, because wage income isn't the "vast majority" of income. 

For NJ's total $426.7 billion in total income in 2018, $289.1 billion was "Salaries & Wages," or 68%. The rest is interest, capital gains, S-corp profits, dividends, royalties, pensions, Social Security, alimony etc.  I don't know what percentage Sheila Reynertsen considers a "vast majority," but 32% of NJ's income is non-salary income and that amount can't be dismissed.

Whatever threshold the NJPP uses for the adjective "vast majority," what is indisputable is that higher income people have more non-salary income. 

For New Jerseyans making under $200,000 a year, wage income is 75% of their income, but for New Jerseyans making over $1 million a year, wage income is only 39%.  The rest is other types of income that is portable.  

For New Jerseyans making $500,000 to $1 million, wage income is 62% of their total earnings.

For New Jerseyans making $25,000-$50,000 a year, non-wage income is still 19% of earnings because that stratum includes people getting retirement income.    

Sometimes non-wage income might be hard to take out of New Jersey, like some S-corp profits, but sometimes wage income is portable too, like in the following scenarios:
  • the person becomes a remote worker.
  • the person moves to another state and becomes a commuter to a NJ-based job.
  • the business itself moves.
So yes, it really is money lost to New Jersey when people leave.  

Remote working was becoming more common even prior to Coronavirus, but its newfound

acceptability presents a challenge to New Jersey.  High-income workers are more likely to be able to work remotely than middle-income and low-income workers.  Given how low NJ's income growth already is, if remote working frees only a few thousand high-income workers from New Jersey or allows New Yorkers and Philadephians to "suburbanize" outside of the region to Florida or resort towns, remote working stands as a problem for our state after the Coronavirus-flight from New York City ends.  


No matter how you analyze the migration patterns of New Jersey's rich people, no matter how you incorporate immigration into your analysis, the fact remains that NJ's all-in income growth, jobs growth, and population growth are all in the nation's bottom ten.  

The state's economy and income do grow -- and the millionaire population grows faster than NJ's general population -- but the growth is insufficient to get New Jersey out of its fiscal vise of debt payments consuming a gradually larger percentage of the budget.  

In the short term, raising taxes on rich people would alleviate one year's budget crisis, but in the long-run, reduce NJ's income growth, revenue growth, and necessitate another round of tax increases.

See Also:

 Note 1:  NJ's Adjusted Gross Income is $406 billion. I'm using total income in this blog post because I want to discuss what percentage of it is possessed by various income strata.  If I considered the deductions people qualify for like the Adjusted Gross Income uses, it would not give as accurate an amount.

Sunday, August 30, 2020

The New Jersey Policy Perspective Misleads on Pensions

As part of its advocacy for the New Jersey Education Association, the New Jersey Policy Perspective has put its imprimatur on several reports arguing that New Jersey's teacher pensions are "modest" and that the pension reform proposals supported by Steve Sweeney, Chris Christie, and other politicians are inappropriate because NJ's teacher pensions are already among the "least-generous" in the United States.

The reports are highly misleading because pensions are just one part of an big enchilada of benefits and privileges that retired teachers get.
  • NJ teachers get Social Security, not all teachers do.
  • NJ teacher pensions are based on very high salaries.
  • NJ teachers get post-retirement healthcare, not all retired teachers do.
  • NJ teacher pensions are untaxed.  
Additionally, the NJPP exaggerates the monetary value of COLAs in other states.

The NJPP pension reports came out in 2014 ("New Jersey has Modest Public Pension Benefits") and 2017, ("New Jersey Pensions Rank Among the Least Generous in the Nation") and have overlapping data and arguments.  They were written by Stephen Herzenberg, who is not a full-time NJPP staffer, but an activist who normally concentrates on Pennsylvania.  As usual with NJPP authors, Herzenberg did not acknowledge in his reports that the NJPP is funded by the New Jersey Education Association.

As it does in many other contexts, the NJPP is inconsistent in its comparison points in order to make arguments that support its funders' needs and/or ideological beliefs, in this case, the belief to be supported is that NJ teachers are undercompensated.
  • The pension reports use interstate comparisons between public employee pensions in New Jersey versus public employee pensions in other states to say that NJ's pensions are ungenerous.  There is no attempt to compare NJ public employee pensions with private sector pensions (which are usually not DB plans).
  • The teacher salary reports use intrastate salary comparisons between NJ teachers versus other NJ workers with bachelors degrees.  There is no attempt to compare NJ teacher salaries with salaries of teachers in other states (which are lower all but three states).
The NJPP also uses divergent interstate comparisons of pension generosity.
  • In comparing pensions based on what percentage of final salary a retiree receives, Herzenberg and the NJPP compare New Jersey to all other states and non-teacher pension plans.
  • In comparing pensions on the dollar amount of the pension, Herzenberg and the NJPP compare New Jersey to only seven other high-cost states, Vermont, Alaska, Maryland, New York, Connecticut, California, and Massachusetts.

Despite the many flaws of the analyses (which I'll explore below), the claim that NJ pensions are modest and ungenerous have caught on in the teacher union-intellectual universe and op-ed pages.  Brian Rock, writing in the NJ Spotlight in March 2019, uncritically believed the reports saying:

In December 2017, New Jersey Policy Perspective released a brief on pensions that compared New Jersey’s system with those in other states, and it found that the Normal Cost of TPAF was average — 35th out of the 69 pension systems they compared it to. Meanwhile, New Jersey’s other main pension fund, the Public Employees’ Retirement System (PERS), was even cheaper. Its Normal Cost is equivalent to 2.4 percent of salary, the 13th lowest rate of these 69 pension systems. 
The answer to our problem is not to further reform the pension system. Public employees have already seen their contributions increase to 7.5 percent of their salary. Meanwhile, the headline of NJPP’s brief was, “New Jersey Public Pensions Rank Among Least Generous in the Nation,” so it’s not like there’s any room left to cut benefits.
Mark Weber also uncritically cited the reports in his 2019 and 2020 reports claiming that NJ's teachers were underpaid.
In 2014, an NJPP analysis found: “…New Jersey ranks 95th in pension generosity among the country’s 100 largest plans.” 40 The ranking was based on the fact the New Jersey pensions have relatively low multipliers – the percentage by which the state calculates pension payments per years of service – as well as no protection for inflation and higher employee contributions than two-thirds of the other plans surveyed. In addition, a 2017 survey of teacher pensions across states found New Jersey’s vesting requirement of 10 years to be among the highest in the nation

The NJPP's Claims are Based on Three Factors Only 

The Herzenberg/NJPP claim is a judgment only of pensions after the post-Chapter 78 reforms, which have not yet begun to effect the majority of teachers and retirees since most NJ teachers and retirees worked before 2011.  

It is solely Tier 5 that the New Jersey Policy Perspective/Herzenberg evaluate as a penurious pension plan, based on these three factors.

Quoting from the 2014 report:

  1. New Jersey retirees have no automatic protection against inflation. While 69 of the 100 largest plans offer retirees some inflation protection, cost-of-living adjustments for New Jersey retirees were suspended indefinitely by the 2011 legislative pension reforms.
  2. New Jersey uses a very low multiplier. The percentage by which New Jersey calculates state pensions per year of service – known as the multiplier – is among the lowest nationally, at 1.67 percent. This means pensions benefits equal 1.67 percent of final salary multiplied by the number of years of service; 1.67 percent is a lower multiplier than all but 21 of the 100 plans. New Jersey lowered the multiplier from 1.81 percent in 2011.
  3. New Jersey employees pay more into the system than those in most other systems. New Jersey public employees contribute 6.93 percent of their salaries to their own pensions, more than 55 other plans in the top 100. By 2018, the employee contribution level for New Jersey pensions will rise to 7.5 percent, which is more than employees contribute today in about two-thirds of the top 100 plans.
John Bury of BuryPensions refuted the Herzenberg/NJPP methodology in several 2014 posts (interesting follow up), but even if one agrees with the NJPP's methodology, pensions aren't the only post-retirement benefit New Jersey teachers get, and in dollars per year of teaching, NJ pensions are far from low.

Social Security

There are fifteen states where no teachers receive Social Security and another three states where some teachers don't receive Social Security.

States where no teachers are eligible for Social Security are Alaska, California, Colorado, Connecticut, Illinois, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio, and Texas.

Some teachers in Georgia, Kentucky, and Rhode Island are ineligible.

All-in, 40% of American teachers don't get Social Security.

Recall that Steven Herzenberg/NJPP directly compares NJ's pensions to other high cost states.  Of the high cost states Herzenberg/NJPP cites that have better pensions, only New York gives teachers Social Security.  Connecticut, California, and Massachusetts do NOT.  
Add caption

By contrast, all New Jersey teachers receive Social Security, so if you factor in Social Security costs alone, New Jersey's pension costs per teacher are solidly in the middle of the country (see graph below).  

In New Jersey, teachers Social Security is paid by the state and is a large expense: $785.5 million for FY2020, or 5% of NJ's state government's education spending, so not a trivial amount.

Pensions are a Lower Percentage of Salaries Than in Most other States, But NJ Salaries are Higher

Both Herzenberg/NJPP and Chad Aldeman actually use the same basis for comparison.  Herzenberg and the NJPP use pensions as a percentage of salary, and Aldeman uses pensions+Social Security as a percentage of salary, but if you actually look at what NJ's salaries are, NJ's teacher pensions are quite high in dollars per year of employment.  

The NJPP analysis emphasizes that NJ's post-2011 pension multiplier is 1.67% of final salary times years employed (n/60), versus the more common 1.81% (n/55), but applied to NJ's high teacher salaries, NJ teacher pensions are quite high in national comparison. 

Average SalaryStudent:Teacher Ratio
New York$86,60912.3
New Jersey$79,90611.7
Rhode Island$78,55513.3
District of Columbia$78,47713.3
National Average$64,54515.7

Since New Jersey's average teacher salary is $79,906, versus the $64,545 national salary, New Jersey teacher pensions are substantially higher.

  • 1.67% of $79,906 equates to $1334 per year of teaching.
  • 1.81% of $64,545 equates to $1168 per year of teaching.  
New Jersey's pensions are also based on end-career salaries, which are substantially higher than average salaries.  According to the TPAF Valuation Report.

Post Retirement Healthcare

The NJPP/Herzenberg also left Post-Retirement Healthcare out of their reports, even though $1 billion annual expense made by the state on behalf of teachers.

Comparing post-retirement healthcare across states is complex and Chapter 78 changed NJ's system to be somewhat less generous to more recent retirees.  Data on post-retirement healthcare generosity is difficult to find and compare, but New Jersey's benefits appear to be more generous than in most other states fore individual retirees.

A 2016 Pew Report "How States Provide Health Benefits to Retired Workers" sheds light on this elusive subject. Idaho does not offer any coverage.  In eleven states all that retired teachers can do is buy into the insurance pool, without any state subsidy.  In most other states, the state's subsidy is capped at a certain amount or at a certain percentage.  NJ's coverage before Chapter 78 was 100% of costs.

Note: New Jersey's post-retirement healthcare was only created in 1987 and is an underdiscussed cause of the pension underfunding that began in the 1990s.  Originally, post-retirement healthcare was paid by a surplus in TPAF and was part of the state's Actuarially Recommended pension payment, but New Jersey abandoned any pretense of pre-funding in the mid-1990s.  Since then, New Jersey's post-retirement healthcare has been PAYGO.

Although this was irresponsible of New Jersey, post-retirement healthcare is PAYGO in most states.

Although NJ teachers must work 25 years to receive any post-retirement healthcare (80% of people who ever  teach will never receive this benefit), it is also a large expense, $1.0 billion for FY2020, or 6.3% of the all-in the State government's education spending.  Post-2011 retirees pay a percentage of health benefits cost.  

NJ Pensions Are Tax-Free

Finally, taxes have to be factored in, since some states claw back some of their pensions in the form of income taxes.

Since 2016's Transportation Trust Fund deal, NJ's pension income has been tax-free: up to $100,000 for married couples, $75,000 for individuals, and $50,000 for married couples filing separately.  NJ's exemption thresholds are high enough to exempt nearly all teacher pensions in New Jersey.  In most other states pension income is either fully taxable or the exemption is much lower than what it is in New Jersey.

In several of the pension funds that Herzenberg and the NJPP rank higher than New Jersey (California and Massachusetts), pensions are fully taxable.  

In New York and Connecticut the exemptions are substantially lower than in New Jersey.

Tax Status of Pensions
Connecticut"Individual taxpayer's pension income is generally taxable (beginning in 2019, an individual taxpayer may deduct 14% of retirement income (increased gradually to 100% for 2025) if federal AGI is below (1) $75,000 for single filers, married taxpayers filing separately, and heads of households; and (2) $100,000 for married taxpayers filing jointly)"
California"Individual taxpayer's pension income is generally taxable."
Massachusetts"Individual taxpayer's pension income is generally taxable."
New YorkSocial Security benefits subtracted from federal AGI. For an individual taxpayer age 59½ or older, $20,000 of pension and annuity income is exempt.
New Jersey"Taxpayers age 62 or older with total income of $100,000 or less may exclude pensions, annuities, or IRA withdrawals of up to $40,000 for joint filers; $20,000 for married taxpayers filing separately; or $30,000 for a single taxpayer, a head of household, or a qualifying widow(er). Taxpayers who did not claim the maximum pension exclusion amount because pension income was less than the maximum exclusion amount for the taxpayer's filing status may use the unclaimed portion of the pension exclusion to exclude other types of income."
AlaskaNo Income Tax
MarylandUp to $29,900, generally, in pension income (except income from an IRA, SEP or Keogh) is excludable for an individual taxpayer age 65 or older.
VermontIndividual taxpayer's pension income is generally taxable.

The state income taxes that retirees would pay aren't as large as post-retirement healthcare and Social Security, but they aren't trivial either.  For a New York retiree with a $50,000 annual pension, state income taxes are $1,079, even after the $20,000 exemption.  The $1,079 is 1.3% of the average teacher's salary.  

In California a retiree with a $50,000 annual pension, state income taxes are $1,563, which is 1.8% of the average teacher's salary.

In New Jersey, a retiree with a $50,000 annual pension would pay $0 in state income taxes on that pension.

In New Jersey, "Taxpayers who did not claim the maximum pension exclusion amount because pension income was less than the maximum exclusion amount for the taxpayer's filing status may use the unclaimed portion of the pension exclusion to exclude other types of income."

Not All COLAs Are Equal

Herzenberg and the NJPP are correct that the lack of a COLA in New Jersey is something that diminishes the value of a New Jersey pension, but they lump all states offering COLAs together, even though, COLAs vary considerably from state to state.  In many states the COLA is just a partial protection against inflation.  

At  an extreme of generosity is Illinois, where public workers have a minimum 3% compounding COLA based on the full pension of a retiree, but other states, the COLA is based on a small fraction of the pension and/or don't make the full inflationary increase.  

Herzenberg does qualify his championing of other states' COLAs by saying "69 of the 100 largest plans offer retirees some inflation protection" [my emphasis], but he does not say that for many COLA is not fully equal to inflation.

For instance, New York State's COLA "is applied only to the first $18,000 of the retirement benefit. The COLA percentage is calculated by taking 50% of the Consumer Price Index (CPI) increase from one March to the next and rounding up to the nearest tenth."  For the most recent year, New York State's COLA on someone getting a pension over $18,000 was only $180, annual.

In Massachusetts, the COLA only applies to the first $13,000 of the pension, although it is the full CPI.  For the FY2020 budget, the COLA was a maximum of $390.

In California, the COLA is 2%, but it is not compounded, so it is +2% of a retiree's initial pension.  Also, the legislature and governor have the power to cancel the COLA if they decide fiscal conditions require it.

California's ad hoc COLA is not unusual.  In many states the COLA is granted by the legislature or pension board and can be suspended.


NJ's pensions are but one part of a comprehensive system of benefits for retirees.  Saying that NJ's pensions are "among the least generous" in the United States is untrue, because pensions aren't the only benefit retirees get, and those pensions are calculated off of high-salaries and are tax-free.  

It's also another reason the NJPP's claims to be a "think tank" shouldn't be taken seriously.  It's a PR firm.

It's bad enough that the NJPP/Herzenberg produce highly misleading research and that teachers like Mark Weber and Brian Rock uncritically believe it, but so do some sources that purport to be more objective.  

EG, the Star-Ledger uncritically agreed NJ's teacher pensions were "stingy":

Of the 100 largest public pension plans in the country, we rank 95th, according to a careful study by New Jersey Policy Perspective, a liberal think-tank with the motto "Facts Matter."

The study found that the average pension benefit for public workers is $26,000. The formula used to calculate those benefits is among the stingiest in the nation.

Keep in mind, too, that the bipartisan 2011 pension reform signed by Gov. Chris Christie eliminated cost-of-living adjustments, even for current retirees. So in each year of retirement, public workers see their real pension income drop.
The acceptance of such biased research as accurate calls into light the NJ media's failure to find disinterested, objective opinions.


See Also: 

Thursday, July 9, 2020

Can New Jersey Increase Teacher Salaries? Should it? A response to Mark Weber and the NJPP

The New Jersey Policy Perspective has written many reports over the years in favor of programs to benefit New Jersey's poorest residents. These include calls to increase cash assistance for poor families, raise the minimum wage to $15 an hour, end the welfare child cap, improve Medicaid, and assist immigrants.   On NJ's budget, the New Jersey Policy Perspective calls for raising taxes on high-earners, cutting New Jersey's corporate tax incentive program, and attacking the belief that NJ's outmigration is harmful or that it has anything to do with NJ's high taxes.

Yet, over the years of my following the New Jersey Policy Perspective, there's only one group of middle-class employees that the NJPP says need more money: NJ's teachers.
One could justify this attention to teacher compensation issues from the New Jersey Policy Perspective that the NJPP is defending members of "America's most embattled profession," who are subject to far more criticism than police & firefighters and the employee classes represented by the CWA.

Then again, another motivation for the NJPP's attention to teacher compensation and production of one-sided reports is that the NJPP is NJEA-funded, getting $695,000 from 2013-2017.

I lack the time to address all of the points made in the NJPP's teacher compensation reports.  This blog post will explore how Mark Weber's (aka "Jersey Jazzman") arguments about teacher salaries are incomplete in important ways and how his demand for salary increases is budgetarily impossible.

A Questionable Premise on Salaries

I find Weber's core contention that NJ teachers are badly underpaid because they make less money
than other holders of college degrees to be dubious.

I disagree with his premise that everyone who has finished the same tier of education ought to get the same compensation.  My expectation is that compensation should be determined primarily by the supply:demand dynamic for an employee's skill-set, and not a fixed amount based on credential acquired.

While teachers do make less money than other college grads, raw salary comparisons omit certain other aspects affecting compensation.
  • Public sector employment is more stable than private sector employment. Private sector jobs are usually at-will jobs, public school teaching jobs are not. 
  • Teachers have nine, continuous weeks off in the summer, which enables time for personal growth, additional income, and/or savings on childcare.
  • Teacher academic records are weaker, on average, than private sector peers.

Of course, teaching has disadvantages over private sector work, like the expectation that teachers use their own money on school supplies (which Weber criticizes) and, in NJ, $1362 per person in union fees (which Weber would never criticize).  New Jersey teachers must also pay 7.5% of their salaries to TPAF, which many might not want to do. (see below)

Looking at NJ in specific, Mike Lilley  of the Sunlight Policy Center points out the flaws in Weber's reasoning, and show that teachers are actually compensated MORE per hour than similarly-educated employees.  Looking at the US as a whole, Andrew Biggs and Jason Richwine do the same, and bust the myth that many teachers have second jobs.

Weber, who presumably received NJPP/NJEA money for his reports, also takes at face-value the NJPP's claims that NJ's pension benefits are the "least generous" in the nation, when the 2014 NJPP pension study ignored several significant issues in overall post-retirement compensation and has out-of-date information on taxes on retirement income.
  • NJ's teachers get Social Security and Post-Retirement healthcare in addition to base pension, whereas nationwide, getting the pension+Social Security+Post Retirement healthcare triple is not the rule.
  • NJ's teacher pensions are based on relatively high salaries.
  • NJ doesn't tax retirement income below $100,000 a year, which exempts virtually every teacher's pension, whereas in most other states retirement income is fully taxable or the exemption threshold is set much lower.
Further, Weber's data on teacher/non-teacher compensation is misleading:
  • The American Community Survey salary data includes private school teachers, who are paid much less per year than public school teachers.  These data is hard to come by specifically for New Jersey, but nationwide, private school teachers earn 60-80% as much as public school teachers.

    Weber admits that private school teachers are lumped into the ACS data, but doesn't disclose how large the salary gap is. 
  • He is comparing mean salary data, when private sector incomes are distorted by high-income outliers. The median salary comparisons would be closer.

    I do not have data on what percentage of NJ's college grads total income is possessed by the top 1%, but for all employees, NJ's 1% takes home 24.3% of income.
The comparison between teachers with MAs and non-teachers with MAs is nonsense because numerous studies have demonstrated that teacher MA programs lack rigor and that teachers with MAs aren't more effective than teachers without MAs.  Additionally, teacher MAs are usually paid for by the school districts, whereas in the private sector MAs are more likely to be paid for by the worker.

Yes, Mark Weber is correct that the number of teacher candidates has shrunk in New Jersey by a larger percentage than the national average (-63%), but the fall in completion is only 47%, a point which Weber quietly makes but not not expand on.
The decline in enrollment led to a decline in the number of people who completed teacher preparation programs (henceforth referred to as “completers”), from 6,373 in the 2009-10 academic year to just 3,366 in 2017-2018, representing a 47 percent decrease. 

Weber, to his credit, says it is possible that when New Jersey's teacher training programs were at their 2009-10 peak and enrolled 21,410 students they were producing an oversupply of novice teachers, calling this an "open question."

Weber also acknowledges that a large portion of the decrease in teacher candidates is due to restrictions in the Alternate Route program.

What are NJ's Teacher Salaries Compared to Other States?

Weber does not attempt in his report to make any kind of interstate comparison of public school teacher salaries, except when he relies on the above-mentioned 2014 propagandistic New Jersey Policy Perspective-commissioned pension report that claims NJ's pensions are extremely low in interstate comparison.

If you actually do a comparison of teacher salaries, New Jersey's instructional staff are the seventh highest paid in the US.

Average Salaries of Instructional Staff
New York$84,384
Rhode Island$76,887
District of Columbia$76,486
New Jersey$74,457
National Average$61,730
Note, these are salaries only. Pensions and post-retirement healthcare are not included.

Relative to the cost of living, New Jersey's teacher salaries are the 11th highest in the US, if analyzed according to the respected (and disinterested) MERIC ratings, but the MERIC ratings do not include taxes.  If one factored taxes in, New Jersey's teacher salaries compared to cost of living would be lower, but roughly half of NJ's taxes go to education anyway, so NJEA-funded folks don't have the same grounds to complain about taxes that everyone else has.   ( ;

However, a difference between New Jersey and teaching elsewhere is one of the lowest student:teacher ratios in the US.

A low student:teacher ratio is not exactly equivalent to having small class sizes, but it's correlated.

Student:Teacher Ratio
New York11.9
Rhode Island13.2
District of Columbia12.7
New Jersey11.9
National Average15.8
Source, NEA Rankings and Estimates

The combination of high teacher salaries, low student:teacher ratios, high overall education spending, strong unions, and other factors, have led WalletHub to rank NJ the #1 or #2 state to be a teacher in most years. 

NJ's Spending is Already Extremely High

New Jersey's education spending per student is no longer #1 in the US, but it remains among the highest in the United States.

Public School Revenue PP
Washington DC$31,230
New York$26,063
New Jersey$21,863

Many New Jerseyans believe that New Jersey's high per student spending is merely proportional to our wealth, but this is erroneous.  New Jersey's spending is still extremely high even relative to GDP and income.

Education Law Center, Fiscal Effort, 2017 DataNational Science Board, 2016 Data
Edu. Spending as % of GDP
Edu. Spending as % of GDP
New Jersey5.39%Alaska4.69%
Maine4.78%New Jersey4.61%
Wyoming4.74%West Virginia4.54%
New York4.73%Wyoming4.33%
USA Average3.79%USA Average3.19%
Sources. Education Law Center: Making the Grade.  National Science Board.

So how much higher is NJ's education spending supposed to become?

Weber observes that NJ's teacher salaries started to lag at the Great Recession:

Figure 17 shows the unadjusted average salary of teachers in New Jersey over two decades. Unsurprisingly, salaries have risen; however, there is a clear slowing of that rise following the Great Recession of 2008.

Teacher salaries may have peaked 2008-2010, but that was an anomalously high spending period, when NJ's education spending reached 4.9% of state GDP, according to the National Science Board's analysis.  New Jersey had only sustained that level for a brief period of time, roughly two years.   It wasn't like New Jersey had always spent so much on education; rather 2010 marked a peak in education spending.

That increase in education spending, which translated into salary growth for teachers, was also powered by several tax increases, like McGreevey's income tax increase in 2004, the 2006 diversion of a half-cent increase in the sales tax into education, and then the temporary income tax increase in 2009.  New Jersey's property taxes also increased by 50% (net of rebates) in the 1999-2009 period.

Do Weber and the NJPP think NJ can increase income tax rates, the sales tax every decade?  Do they want 5%+ annual property tax increases to come back?

"Unsurprisingly, salaries have risen; however, there is a clear slowing of that rise following the Great Recession of 2008."

According to the National Science Board, NJ's education spending rose from 3.68% of GDP to 4.9% of GDP from 2000 to 2010, a level of increase that was not sustainable and which was not paralleled on a national basis.

Can New Jersey Spend More?

Weber's reports are lengthy, but another major quantity he doesn't provide is what it would cost to bring New Jersey's teacher salaries in-line with the private sector.

It's unclear how much of a salary increase the NJEA/NJPP/Weber want, but New Jersey has 140,000 teachers, so if we increased salaries by $10,000 per teacher, that would cost $1.4 billion in direct salaries, and then tens of millions more in FICA taxes and TPAF.
  • Since the employer-side FICA tax rate is 7.65%, the state would owe an additional $107.1 million if there were a $10,000 per teacher increase.
  • TPAF is more complex since there are different tiers of employees and pensions depend on how long teacher works,  but for Tier 1 teachers who work 25 years, another $10,000 a year would equate to another $4550 per year per retiree.  For Tier 5 teachers, it would equate to another $4170 per retiree. 

    Since there are now 94,000 retirees getting money from TPAF, we are talking about something that would eventually raise pension payouts by close to $400 million a year. 
I am not an actuary and cannot estimate how much the state would have to put into TPAF to sustain higher pension payments, but it would not be a trivial amount.  Since New Jersey cannot fully fund TPAF at existing salaries, fully funding TPAF if salaries are substantially higher is impossible.

Further actual cost increases would be higher because increasing teacher salaries would create pressure to increase the salaries of other school staff, such as administrators.

Can New Jersey afford to spend another $1.5-$2 billion a year on education? 

Or, would it be worth it to increase teacher salaries if it means that New Jersey hires fewer teachers and has a higher student:teacher ratio?

There is Only a Subject-Specific and District-Specific Recruitment Problem

The biggest absence in the NJEA/NJPP/Weber report is that it does not acknowledge how teacher recruitment dynamics range from huge gluts in areas like high school social studies and elementary education to shortages in the hard sciences, math, ESL, and special ed.

The above chart is based on data from 1998-2018, but May 2019 testimony from disinterested DOE officials corroborates that not much has changed.

During an Assembly Education Committee hearing last week, Diana Pasculli, deputy assistant commissioner of performance at the New Jersey Department of Education, told members of the panel there’s “some misalignments between the supply and demand of our workforce.” 
She said while there is an overflow of elementary school teacher candidates every year, there are teacher shortages for certain subjects, including science, math, bilingual education, English as a second language and career and technical education. 
“Those are areas of concern for us, where we don’t see enough educators going through the whole pipeline and being ready to fill those roles," she said. 
At the same time she stressed there isn't a broad-strokes shortage — "we see real struggle and concern in certain subjects.” 
And there are struggles and shortages in certain regions of the state as well, Pasculli said.
She told members of the panel close to 7,000 individuals receive teacher certifications each year, but only about 4,000 new teachers are hired every year — because of the teacher supply-and-demand mismatch.
New Jersey's official filings with the federal Department of Education indicate shortages in 37 low-income districts and the following subjects:

2017–2018 Statewide Academic Disciplines or Subject Matter 
 Bilingual/Bicultural English as a Second Language (ESL)
Mathematics Middle School (All)
Science (All)
Special Education
World Languages (All)
All Career and Technical Endorsements

Analyses of Title II reporting by the US Department of Education also shows that there are large disproportionalities in what subjects NJ teacher candidates are being prepared in.  In 2017-18, the most recent year data is available, New Jersey's education schools only had a single student who had majored in computer Science teacher (someone at Rider), only 3 Chinese majors, 19 physics majors, and 31 chemistry majors.  By contrast, NJ's ed schools had 1541 elementary education majors and 147 physical education majors.

These are the data for teachers trained at Montclair State in 2017-19, NJ's largest teacher program.
Source, 2019 Title II Report

The common sense solution to NJ teacher recruitment issues is to pay teachers of hard-to-staff subjects more money, but that notion of differential pay is anathema the unionist preference for lockstep salary guides.

Do DB Pensions and Post-Retirement Healthcare Help Recruitment?

Weber defends Defined Benefit pension plans and warns against any attempts to reform them.
New Jersey must shore up its teacher pension system and stop degrading teacher health care benefits. There is an indisputable wage gap between teachers and other college-educated employees. Good benefits can help close this gap, but New Jersey has, over the past decade, degraded the value of teacher pensions and health care benefits.  The decline in enrollees in teacher preparation programs suggests that these policies have had detrimental consequences. The state must take steps to reverse the eroding value of retirement and health care benefits for teachers.

New Jersey's teacher compensation is heavily backloaded due to the structure of district salary guides, the vesting of pensions after 10 years of employment, and the eligibility for post-retirement healthcare only after 25 years of employment.

Source, TPAF Actuarial Valuation Report,

Notice how small the salary jump is from 1-4 years to 5-9 years (only $5216 per year) versus 5-9 years to 10-14 years (+$10,373) and then from 10-14 years to 15-19 years (+$13,484).  Increases are smaller after 20 years, but that is when non-salary increases in pensions and post-retirement healthcare come in.

One can assume that having a backloaded compensation structure helps with teacher retention, although it's debatable if that is the public's educational interest because sometimes veteran teachers may be burned out and/or have more frequent absences.  But does a backloaded compensation program help with recruitment in the first place?

For the type of person who expects to spend his or her entire working life in the same career and in the State of New Jersey, a DB pension and Post-Retirement Healthcare program would likely be a magnet, but for people who expect to have several careers and think they may not live their entire working lives in New Jersey, it's difficult to imagine how DB pensions and Post-retirement healthcare are strong draws.

There is disinterested polling and research evidence, documented by Laura Waters of NJLeftBehind in a blog post "OK Boomer," that today's young generation expects to be highly mobile in careers and not tied down to a single career.

According to TPAF's Actuarial Valuation Report,  45% of NJ teachers leave the TPAF system before their pension vests.  Another 41% of teachers leave before year 24, which is one year shy of post-retirement healthcare eligibility.

So, at least 80% of people who start teaching never get the Post-Retirement Healthcare which is a $1 billion state expense, or nearly 3% of NJ's combined state + local education spending.

Young people considering teaching are probably not aware of pension formulas or the vesting points, but it's probable that they do know that New Jersey's pensions are badly underfunded and the promised benefits of today are likely going to be cut.  They likely suspect that pension deduction that is taken out of every paycheck and  is used to prop up a Pyramid Scheme they will not get full benefits of.

Teacher Shortages in the Future? 

Clearly NJ is producing fewer new teachers than it was a decade ago, although he exaggerates the fall by not acknowledging the low completion rate of the past, but does this mean we are going to have a teacher shortage?

Certainly staffing will become more difficult in in-demand fields, but New Jersey's student enrollment is expected to decline over the next few decades.

The number of babies born in NJ peaked in 1990 (123,125 births) and the NJ's K-12 student enrollment peaked in 2005-06 (1.4 million).

In 2019 there were only 99,549 births in NJ and 1.34 million students.

As smaller cohorts of people enter into adulthood, birthcounts will continue to fall.  The Coronavirus Recession will likely have a large negative impact on births as well though that won't show up in kindergarten enrollment until 2026.

Although the decline in NJ births is smaller than the decline in teacher candidates, the decline will mitigate any teacher shortages into the future.

The caption above is incomplete, NJ had 99,549 births in 2019.


I have not been able to address all of the points in Weber's reports which merit attention, but Weber's reports have a large gap in that they do not acknowledge there is only a subject-specific and district-specific teacher shortage.

Weber exaggerates the teacher/non-teacher pay gap by using salary data that includes private school teachers and using mean salary instead of median salary, but I can agree that higher salaries would likely improve recruitment.  However,  an across-the-board teacher shortage doesn't exist and since New Jersey is a fiscal disaster, it must target its money where the need to improve recruitment is the greatest.

New Jersey should encourage districts to publicly pay a premium to teachers of hard-to-state subjects and continue the full funding of SFRA to enable higher salaries in less desirable-to-teach-in districts.