Pension Costs and Retirement Decisions in Plans that Combine DB and DC Elements: Evidence from Oregon

Source: John Chalmers, Woodrow T. Johnson, Jonathan Reuter, National Bureau of Economic Research, NBER Working Paper No. 18517, November 2012
(subscription required)

From the abstract:
The Oregon Public Employees Retirement System (PERS) is a hybrid pension plan that provides employees the security of a defined benefit (DB) pension plus the option to receive instead retirement benefits based on a defined contribution-style (DC) retirement account. We use PERS administrative data for 1990 to 2003 to study the effect of this hybrid design on employers’ costs and employees’ retirement-timing decisions. We have four findings. First, the option built into PERS is costly for employers to provide. Ex post, average retirement benefits are 49% higher in the hybrid plan than they would have been in a traditional DB plan. For the typical retiree, simulations show that our ex post estimate lies between the 50th and 75th percentiles of the ex ante distribution. Second, the hybrid plan distorts employees’ retirement timing decisions relative to a traditional DB plan. Looking across benefit formulas, we find that as an employee’s DC benefit increases above her DB benefit, so does the probability that she retires before the normal retirement age. Third, we find that retirement timing decisions respond to two sources of exogenous variation in the level of the DC benefit. Finally, we find evidence of peer effects in that employees respond more strongly to their own retirement incentives when more of their coworkers face similar incentives. The retirement waves that result from employees seeking to avoid declines in pension benefits are likely to impose significant administrative costs on employers.

Leave a Reply