Working Paper: NBER ID: w21385
Authors: Robert L. Clark; Emma Hanson; Olivia S. Mitchell
Abstract: We explore what happened when the state of Utah moved away from its traditional defined benefit pension. In its place, it offered new hires a choice between a conventional defined contribution plan and a hybrid plan option, where the latter has both a guaranteed benefit component and a defined contribution plan where employees bear investment risk. We show that around 60 percent of new hires failed to make any active choice and, as a result, were automatically defaulted into the hybrid plan. Slightly more than half of those who made an active choice elected the hybrid plan. Post-reform, employees who failed to actively elect a primary retirement plan were also far less likely to enroll in a supplemental retirement account, compared to new hires who actively selected a plan. We also find that employees hired following the reform were more likely to leave public employment, resulting in higher separation rates. This could reflect a reduction in the desirability of public employment under the new pension design and an improving economic climate in the state. Our results imply that public pension reformers must consider employee responses in addition to potential cost savings, when developing and enacting major pension plan changes.
Keywords: pension reform; defined benefit; defined contribution; employee behavior; turnover rates
JEL Codes: H55; H75; J26; J38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Utah's pension reform (H55) | employee behaviors (M51) |
| default assignment into hybrid plan (C69) | likelihood of enrolling in supplemental retirement accounts (H55) |
| higher separation rates from public employment (J68) | reduced desirability of public employment (J45) |
| pension reform (H55) | likelihood of saving more in supplemental plans (G52) |