Vouchers, Educational Standards and the Future

Earlier this month, Utah’s legislature approved the biggest school voucher program in the country, allotting any child in public school up to $3000 toward private school tuition.

While other states have voucher programs geared mainly towards allowing poor children to attend private schools, the Parents for Choice in Education Act makes Utah the first state in the nation that will have no such restrictions, effectively making any child eligible to receive aid to attend the school of their choice. The amount of assistance provided to each family varies depending on income, but even wealthy families would be eligible to receive at least $500 per child.

The topic of school vouchers has a long, controversial history in the world of education policy. Proponents argue that the law is an important step forward for school choice and educational freedom, and that parents have the right to pull their children from poorly performing public schools. Opponents counter that vouchers don’t fix the problems in public schools, and will make them worse by draining them of high-achieving students.

In some ways, both arguments miss the point. The move of states like Utah to institute broad voucher systems is indicative of the extent to which our nation’s educational system is failing to meet the needs of our children. Most attempts to establish national standards-based school reform have been inadequate, leading to a patchwork system of educational standards that varies from state to state. As a result, even though the US spends more per capita per student on education than any other G8 country, our students lag behind in most performance measures, particularly in math and science. Seen in this light, Utah’s initiative is understandable. However, national education reform still deserves renewed attention, especially given that 2007 marks the fifth anniversary of No Child Left Behind Act.

Among the recent attempts to close the education gap in our nations schools, The Standards to Provide Educational Achievement for All Kids (SPEAK) Act has received attention as a bipartisan effort to establish common math and science standards nationwide. Written by Sen. Christopher J. Dodd (D-CT) and Rep. Vernon Ehlers (R-MI), the SPEAK Act attempts to address the achievement gap in our nation’s schools and to make America’s students more globally competitive, especially in math and science by establishing a rigorous set of standards and then providing incentives for states to meet them. Nationwide standards are a start. However, once states adopt these standards (which are voluntary), what will matter most to helping our schools meet them? Is it attracting a talented, skilled workforce of teachers? And how can we recruit our brightest students to become full-time teachers where they are needed most?

Amanda Levinson | Director of Policy Programs

Oppportunity Economics for the U.S. Military

By Ben Atkins, HSG volunteer

Is the U.S. military a social trampoline? “Yes, but . . .” Our servicemembers personify Opportunity Economics: they embrace risk and sacrifice in the pursuit of new challenges and responsibilities. A recent Pentagon survey, for example, found that 76% of its enlisted joined because of education, training and personal growth opportunities. The military, however, could support Opportunity Economics by overhauling its pension system: a modern defined contribution system would improve military readiness and the bounce in individuals’ social trampolines.

Despite extraordinary changes in warfare, technology, and private sector pension plans, the current system remains founded on a framework established in 1916. In the simplest terms: retirees with 20 years of service earn half-pay. (The formula uses “base pay”; retirees effectively receive 34% of compensation, using broader measures to include housing, occupational bonuses, and tax advantages.) Earlier departures forfeit all retirement benefits. In contrast, the 1974 ERISA Act outlaws corporate vesting schemes beyond 7 years. Subsequent legislation created 401(k) programs to protect workers and to promote economic efficiency. Pension portability is central in Opportunity Economics, offering a vehicle for accumulating savings and promoting flexibility to pursue the most attractive careers. Importantly, the latter point does not conflict with the military force management goals; portability and flexibility would dramatically improve recruiting and retention in the military.

Any proposals must be judged through their effect on the services’ force management capabilities. Uniquely, the military cannot hire senior personnel from the outside—today’s lieutenants represent tomorrow’s generals. Defenders of the current system highlight several crucial strengths. First, 20-year “cliff-vesting” stabilizes the force, insulating it from the effects of changes in the broader labor market. Second, it ensures a core of motivated, experienced, professional warriors. Last, deferred compensation elicits superior performance from servicemembers committed to reaching the 20-year milestone. As numerous commissions and studies have found, however, an alternative system based on Opportunity Economics (earlier vesting, personal control of assets, and government contributions) excels on precisely these criteria.

Today’s retirement system falls short from private to general. Although the government allocates 30% of compensation outlays to meet retirement liabilities, prospective recruits and young servicemembers profoundly undervalue these contributions. How many of these young people expect to realize the benefits? Only 15-20% will serve for 20 years. Additionally, they strongly prefer cash today over future payments. (The government borrows at a rate of 4-5%, yet evidence suggests that young people require returns of 10-15% to forego immediate consumption.) Last, future payments are exposed to the vagaries of congressional action. A DC system would revolutionize recruiting and junior-level retention through explicit, immediate retirement benefits and the replacement of political risk with market risk.

The current system succeeds in maintaining a core of mid-career expertise, but not without costs. The crude 20-year mechanism forces an early decision to “exit or go for 20.” In turn, at about the 12-year point, the services act as if involuntary separation represents betrayal. This “implicit contract” creates severe inefficiencies. Fundamentally, it vitiates force planning based on mission needs—instead, the size and shape of the force become supply-driven. Additionally, this arrangement limits advancement opportunities for younger cohorts, and it reduces morale by eroding an uncompromising meritocracy. How many organizations agree not to fire underperformers?

The worst inefficiency occurs in the senior ranks. The reformers of 1916 sought to promote “youth and vigor” in the service. Changes in technology, though, make the 20-year trigger suboptimal. Today, the services encourage top performers of all specialties—e.g., aviators, doctors, linguists, electronics technicians—to take their talents elsewhere at an average age of 42. This occurs through the enormous opportunity cost created after the 20-year point: continued service receives (incrementally) half-pay. Surely a system consistent with Opportunity Economics would reject such a significant distortion in an individual’s decision-making.

A corporation with this system wouldn’t survive. Would a CEO accept a compensation system that lacked incentives for critical leaders and skills? In contrast, a military system founded on a DC plan would, at lower cost, empower services to align resources with requirements through tailored vesting, contributions, and matching. In the 1990s the RAND Corporation completed an extensive analysis for the Office of the Secretary of Defense; they concluded that a transition to a DC plan was both feasible and superior. In 2000 Congress expanded the federal DC plan to servicemembers, but the services opted not to provide government contributions.

In 2001 the Army introduced a new marketing theme, the “Army of One.” This campaign reflects how servicemembers thrive on principles central to an opportunity economy—autonomy, accountability, and informed risk-taking. Extolling the virtues of self-reliance, Ralph Waldo Emerson writes, “We have not chosen, but society has chosen for us. We are parlour soldiers. We have shunned the rugged battle of fate, where strength is born.” Young people embrace the tenets of Opportunity Economics; the U.S. military should respond.

Ben Atkins was the Naval Academy valedictorian in 1992. He served as a submariner from1994-2000. An detailed proposal for reform of the military retirement system won second place in a 2006 Department of the Navy essay contest; it can be read in full here.

Opportunity Economics Colloquium a Success

On February 1 and 2, Hope Street Group hosted its first annual Opportunity Economics Colloquium at the Aspen Institute in Wye River, Maryland. This unique event, “Building the Opportunity Economy,” brought together a bipartisan group of 39 leaders from business, civil society and politics to discuss the state of opportunity in America and to propose action-oriented solutions for the future. Participants brainstormed how to reform our educational system, expand access to health care, promote asset-building, increase entrepreneurship, raise healthy families, and make America’s workforce more globally competitive in the 21st century.

Participants found common ground on a wide range of proposals related to these issues, and agreed that it was essential to work on a bipartisan basis if America is to remain competitive and have a robust middle class.

Hope Street Group also presented the preliminary findings from our groundbreaking Economic Opportunity Index on what has mattered most to driving economic opportunity over the past 25 years, the findings of which were the subject of an article in yesterday’s Financial Times.

In attendance was a range of leaders from a variety of sectors, including former RNC chairman Ken Mehlman, Senator Debbie Stabenow (D-MI), Houston Mayor Bill White, former Goldman Sachs chairman Stephen Friedman, chairman of the Capital Group David Fisher, SEIU president Andy Stern, NAACP president Bruce Gordon, and Teach for America founder Wendy Kopp.

In a sign that discussions about the state economic opportunity in America are beginning to move to the forefront of our economic policy agenda, today Federal Reserve Chairman Ben Bernanke gave a talk about the threat to economic well-being today to Omaha’s Chamber of Commerce, stating “the challenge for policy is not to eliminate inequality per se but rather to spread economic opportunity as widely as possible.” Thanks to the dialogue at our colloquium, we think we have a few ideas on how to make that a reality. Check back in the coming weeks for more detailed reports on the EO index, and the objectives that surfaced from Hope Street Group’s colloquium, which we hope to make an annual event.