This article examines the pattern of incentives for work versus retirement in six state teacher pension systems. We do this by examining the annual accrual of pension wealth from an additional year of work over a teacher's career. Accrual of wealth is highly nonlinear and heavily loaded at arbitrary years that would normally be considered mid-career. One typical pattern exhibits low accrual in early years, accelerating in the mid-to late fifties, followed by dramatic decline or even negative returns in years that are relatively young for retirement. Key factors in the defined benefit formulas that drive such patterns are identified along with likely consequences for employee behavior. The authors examine efficiency and equity consequences of these systems as well as options for reform.

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The authors analyze the Arkansas teacher pension plan and empirically gauge the behavioral response to incentives embedded in that plan and to possible reforms. The pattern of pension wealth accrual creates sharp incentives to work until eligible for early or normal retirement, often in one's early fifties, and to separate shortly thereafter. We estimate the effect of pension wealth accrual on teacher separation decisions using a new longitudinal data set of Arkansas teachers and find a significant impact. We then simulate the response to eliminating early retirement and raising the service requirement for normal retirement. We also simulate a shift to a constant accrual retirement plan. The response to both reforms is complex, as some would leave earlier and others stay longer. A constant accrual plan smoothes the pattern of retirement behavior as individuals tailor decisions to their own preferences instead of those built into the pension formula.

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