The Market Sensitivity of Retirement and Defined Contribution Pensions: Evidence from the Public Sector
47 Pages Posted: 12 Jun 2012 Last revised: 23 Nov 2016
Date Written: November 10, 2016
I provide evidence that defined contribution (DC) pensions make retirement more positively correlated with stock market returns as compared to defined benefits (DB) pensions. To identify the effect, I exploit the U.S. federal government’s switch in 1984 from a DB pension system (CSRS) to a hybrid-DC pension system (FERS). I estimate that FERS exposes approximately 24% more pension wealth to the financial markets. Compared to untreated employees, employees treated with the hybrid-DC pension respond to a one standard deviation shock to quarterly market returns by adjusting their retirement date by approximately one month, approximately offsetting changes in DC pension wealth with labor income.
Keywords: Defined Contribution Pensions, Retirement, Stock Market Returns, Federal Employees
JEL Classification: H55, J22, J26, G01, D12
Suggested Citation: Suggested Citation