Faced with unfunded pension liabilities, many states have redesigned their pension plans for public sector workers. The focus of these pension reforms in recent years has been on changing the design of traditional defined benefit (DB) retirement plans as well as changing the plan type to a defined contribution (DC) plan or a hybrid plan that includes both DB and DC components. But these changes will also affect workers' incentives to stay or leave the workforce, thereby affecting the size of the workforce and its experience mix.
In this working paper, the authors assess the impact of pension reform on retention using data on public sector teachers. They estimate a common stochastic dynamic programming model using administrative personnel data on public school teachers for three states, Pennsylvania, South Carolina, and Tennessee, and use the estimated model parameters to simulate how alternative pension reforms would affect teacher retention over a career.
Despite differences in preferences, teacher pay, external job markets, and policy across states, model simulations show that common policy reforms lead to qualitatively similar findings. Changes to retirement plan design have substantive effects on the retention of new hires over their entire career. Lower benefits and higher employee contributions result in lower retention over the early to mid-career, leading to greater turnover during those parts of the career.
This working paper should be of interest to the research community concerned with pension reform and the workforce effects of these reforms.