Working Paper: NBER ID: w18517
Authors: John Chalmers; Woodrow T. Johnson; Jonathan Reuter
Abstract: Oregon's Public Employees Retirement System (PERS) is a rich setting in which to study the effect of pension design on employer costs and employee retirement-timing decisions. PERS pays retirees the maximum benefit calculated using three formulas that can be characterized as defined benefit (DB), defined contribution (DC), and a combination of DB and DC. From the employer's perspective, we show that this "maximum benefit" calculation is costly. Average ex post retirement benefits are 54% higher than they if had been calculated using only the DB formula. Monte Carlo simulations verify that the higher cost could have been predicted at the start of our sample period. From the employee's perspective, we show that plan design distorts the retirement-timing decision: employees receiving DC benefits are significantly more likely to retire before the normal retirement age than employees receiving DB benefits. Exploiting two sources of exogenous variation in the level of the DC benefit, we show that employees respond to within-year variation in their retirement incentives and, consistent with peer effects, that they respond more strongly to these incentives when more of their coworkers face similar incentives. Finally, consistent with the emerging literature on financial mistakes by households, we show that a small but significant fraction of retirees would benefit from shifting their retirements by as little as one month.
Keywords: Pension design; Employer costs; Employee retirement choices; Public Employees Retirement System
JEL Codes: D83; H55; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| plan design (C90) | distorts retirement timing decisions (J26) |
| a small fraction of retirees shifting their retirement by as little as one month (J26) | costly mistakes regarding retirement timing (J26) |
| maximum benefit calculation in PERS (H55) | significantly higher costs for employers (J32) |
| employees receiving DC benefits (J32) | significantly more likely to retire before the normal retirement age (J26) |