The Impact of a DROP Program on the Age of Retirement and Employer Pension Costs

Boston College Center for Retirement Research Working Paper No. 2010-11

47 Pages Posted: 9 Nov 2010

See all articles by Samson Alva

Samson Alva

University of Texas at San Antonio - College of Business - Department of Economics

Norma Coe

University of Pennsylvania - Perelman School of Medicine

Anthony Webb

Boston College - Center for Retirement Research

Date Written: August 20, 2010

Abstract

This paper investigates the impact of a Deferred Retirement Option Plan (DROP) on the age of retirement of employees covered by defined benefit pension plans provided by the City of Philadelphia. We show that the program results in significant and substantial increases in the age of retirement: 1.25 years on average for municipal employees. Employees make use of the program in ways that maximize the expected present value of their pension benefits, with municipal employees entering the program an average 2.1 years before the age at which they would otherwise have retired. Consequently, the program results in a substantial increase in pension cost. We estimate that the program has cost the city around $258 million over the period to 31 December 2009. We construct an indicator of employee quality and find that some classes of high-quality employees are disproportionately likely to delay retirement as a result of the program.

Keywords: Deferred Retirement Option Plan, DROP, Pension

Suggested Citation

Alva, Samson and Coe, Norma and Webb, Anthony, The Impact of a DROP Program on the Age of Retirement and Employer Pension Costs (August 20, 2010). Boston College Center for Retirement Research Working Paper No. 2010-11. Available at SSRN: https://ssrn.com/abstract=1695184 or http://dx.doi.org/10.2139/ssrn.1695184

Samson Alva

University of Texas at San Antonio - College of Business - Department of Economics ( email )

6900 North Loop 1604 West
San Antonio, TX 78249
United States

Norma Coe (Contact Author)

University of Pennsylvania - Perelman School of Medicine ( email )

423 Guardian Drive
Philadelphia, PA 19104
United States

Anthony Webb

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States

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