The Effect of Pension Design on Employer Costs and Employee Retirement Choices: Evidence from Oregon

John Chalmers, Woodrow Johnson and Jonathan Reuter

No 18517, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D83 H55 J26 (search for similar items in EconPapers)
Date: 2012-11
New Economics Papers: this item is included in nep-age, nep-dem and nep-lab
Note: AG PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as Chalmers, John, Woodrow Johnson, and Jonathan Reuter, 2014, “The Effect of Pension Design on Employer Costs and Employee Retirement Choices: Evidence from Oregon,” Journal of Public Economics 116 (August): 17-34.
Published as The Effect of Pension Design on Employer Costs and Employee Retirement Choices: Evidence from Oregon , John Chalmers, Woodrow T. Johnson, Jonathan Reuter. in Retirement Benefits for State and Local Employees: Designing Pension Plans for the Twenty-First Century , Clark, Rauh, and Duggan. 2014

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Journal Article: The effect of pension design on employer costs and employee retirement choices: Evidence from Oregon (2014)
Chapter: The Effect of Pension Design on Employer Costs and Employee Retirement Choices: Evidence from Oregon (2012)
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