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

Matthew Gustafson

Pennsylvania State University - Smeal College of Business

Date Written: November 10, 2016

Abstract

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

Gustafson, Matthew, The Market Sensitivity of Retirement and Defined Contribution Pensions: Evidence from the Public Sector (November 10, 2016). Journal of Public Economics, Vol. 145, p. 1-13, 2017. Available at SSRN: https://ssrn.com/abstract=2083169 or http://dx.doi.org/10.2139/ssrn.2083169

Matthew Gustafson (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

East Park Avenue
University Park, PA 16802
United States

Paper statistics

Downloads
117
Rank
191,178
Abstract Views
929