May 16, 2018
Many school districts have used or are considering the use of voluntary retirement incentives. The intent of these incentives is to decrease the payroll cost of their workforce, decrease retirement fund liability, decrease workforce size without layoffs, or a combination of these outcomes. At the end of the 2017 school year, Chicago Public Schools offered a one-time, unanticipated retirement incentive for the purpose of reducing its cost by shifting from the employment of retirement-eligible to new teachers; the latter group is paid 70 percent of the senior teacher's salary. It offered $1,500 per year of service of non-pensionable income for teachers who agreed to retire immediately. We use a dynamic model of teacher retention behavior to predict the number of teachers willing to accept this voluntary retirement incentive and retire. The model is estimated using individual-level data on entry cohorts of Chicago teachers from 1979–2000, which are the cohorts affected by the retirement incentive. Our model predicts that only 588 of the 2,700 teachers eligible for the benefit will retire. Our research reveals two important dimensions to consider in retirement incentive design. First, a voluntary retirement incentive results in substantial economic rents: payments to individuals who would have retired without the incentive. For Chicago's incentive, this would amount to 73% of payments. Second, if the incentive appeals to individuals closest to indifference between continuing to teach and retiring, those who are incentivized to retire would have likely retired within a few years without the incentive. In the case of Chicago, if they replace all teachers that are incentivized to retire, we find negative cost savings over the next six years. If not all retiring teachers are replaced, the cost savings could be positive.