Defined Benefit Pension Plan Distribution Decisions by Public Sector Employees

Abstract

At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w18488.ack NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Navigating complex financial decisions at retirement: evidence from annuity choices in public sector pensions

“…Plan actuaries set the terms of all annuity options so that they are considered present value neutral to the system. 5 There is also an option to take a lump sum withdrawal, but most benefit claimants with long careers find that the present value of the annuity greatly exceeds the lump sum (Clark et al 2014).…”

Annuity pricing in public pension plans: importance of interest rates

“…Public retirement systems also offer lump sum distributions; however, as mentioned above, these distributions typically are based only on employee contributions plus some specified interest rate. Unlike retirees in the private sector, public employees rarely request lump sum distributions once they are eligible to immediately begin a retirement annuity (Clark et al, 2014).…”

“…There has been considerable research examining the decision of private sector workers to choose lump sum distributions instead of accepting a life annuity from their retirement plan (Brown, 2001;Butler and Teppa, 2007;Brown et al, 2008;Benatzi et al, 2011). While state and local pensions offer lump sum distributions, public employees reaching retirement age rarely choose a lump sum distribution (Chalmers and Reuter, 2012;Clark et al, 2014) because of the way the lump sum is calculated and the link between an annuitized benefit and retiree health insurance coverage.…”

Annuity Options in Public Pension Plans: The Curious Case of Social Security Leveling

“…Similar to most public defined benefit plans, in TSERS and LGERS lump sum distributions are based solely on employee contributions plus accrued interest. Most benefit claimants with long careers who have attained retirement eligibility find that the present value of the annuity greatly exceeds the lump sum distribution amount (see Clark, Morrill, and Vanderweide, 2014).…”