Working Paper: NBER ID: w18448
Authors: Alicia Munnell; Jean-Pierre Aubry; Joshua Hurwitz; Laura Quinby
Abstract: Public sector defined benefit pension plans are based on final earnings. As such, these plans are back-loaded; those with long careers receive substantial benefits and those who leave early receive little. The analysis consists of three parts. The first section discusses the design of state and local defined benefit plans, documents the extent to which traditional public sector final earnings plans are back-loaded, and explores the extent to which the incentives may reflect the preferences of employers. The second section shows how participation in final earnings plans affects the lifetime resources of state and local workers of various tenures compared to private sector workers. The third section presents plan-level data on the flows of participants out of the plan by age and tenure and explores the extent to which plan design - specifically, vesting periods, mandatory participation in a defined contribution plan, and Social Security coverage - affects the probability of vesting and the probability of remaining to the earliest full retirement age once vested. The findings suggest that complete reliance on delayed vesting and final earnings plans results in minimal benefits for most short-service public employees. Hence, the recent trend towards hybrid arrangements is a positive development not only for risk sharing between taxpayers and participants but also for a more equitable distribution of benefits between short-term and career employees.
Keywords: public sector; defined benefit plans; pension plans; short-service employees
JEL Codes: H75
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| backloaded final earnings plans (G35) | optimal design for attracting a diverse workforce (J68) |
| backloaded final earnings plans (G35) | lifetime resources of short-service employees (J26) |
| social security coverage (H55) | benefit structure and participant behavior (J32) |
| social security coverage (H55) | retirement outcomes (J26) |
| hybrid plans (H44) | equitable distribution of benefits between short-term and career employees (J32) |