Pension Enhancements and the Retention of Public Employees

Abstract

We use data from workers in the largest public-sector occupation in the United States -teaching -to examine the effect of pension enhancements on employee retention. Specifically, we study a 1999 enhancement to the benefit formula for public school teachers in St. Louis that resulted in an immediate and dramatic increase in their incentives to remain in covered employment. To identify the effect of the enhancement on teacher retention, we leverage the fact that the strength of the incentive increase varied across the workforce depending on how far teachers were from retirement eligibility when it was enacted. Our results indicate that the St. Louis enhancement -which was structurally similar to enhancements that were enacted in other public pension plans across the United States in the late 1990s and early 2000s -was not a cost-effective way to increase employee retention.

Teacher Pension Workshop: Connecting Evidence-Based Research to Pension Reform: Are Teacher Pensions "Hazardous" for Schools?

“…Although these studies generally concur that teachers behave predictably in the face of pension incentives, Fitzpatrick (2015) and Koedel and Xiang (2017) show that teachers likely value them at much less than they cost.…”

“…There are a growing number of papers examining the effects of changes in retirement benefits (e.g., Fitzpatrick [2015]; Fitzpatrick and Lovenheim [2014]; Furgeson, Strauss, and Vogt [2006]; Koedel and Xiang [2017]). The most closely related study is Fitzpatrick and Lovenheim (2014), which finds that early retirement incentives have little effect on student test scores and may increase scores in schools with a large proportion of economically disadvantaged students.…”

Do Pension Cuts for Current Employees Increase Separation?

“…However, it is difficult to determine whether these estimates would play out in reality without exploiting a natural experiment and, to our knowledge, no one has taken this route. Koedel and Xiang (2017) examine a benefit enhancement for teachers in the 1990s and are unable to detect a change in retention for mid-career employees. Two considerations, however, suggest caution when extrapolating from this study to benefit cuts for public sector workers more broadly.…”

Social Security and Retirement Timing: Evidence from a National Sample of Teachers

“…Teachers' responsiveness to changes in financial incentives is typically small. Koedel and Xiang (2017) leverage variation in how a pension enhancement in St. Louis affected pension wealth for teachers differentially by years until retirement eligibility. Similarly, Brown (2013) exploits a change for California teachers and finds a significant but small elasticity of lifetime labor supply with respect to the return to work.…”