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The Effect of Pension Design on Employer Costs and Employee Retirement Choices: Evidence from Oregon

55 Pages Posted: 11 Nov 2012  

John Chalmers

University of Oregon

Woodrow T. Johnson

U.S. Securities and Exchange Commission

Jonathan Reuter

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: November 2012

Abstract

Oregon's Public Employees Retirement System (PERS) is a rich setting in which to study the effect of pension design on employer costs and employee retirement-timing decisions. PERS pays retirees the maximum benefit calculated using three formulas that can be characterized as defined benefit (DB), defined contribution (DC), and a combination of DB and DC. From the employer's perspective, we show that this "maximum benefit" calculation is costly. Average ex post retirement benefits are 54% higher than they if had been calculated using only the DB formula. Monte Carlo simulations verify that the higher cost could have been predicted at the start of our sample period. From the employee's perspective, we show that plan design distorts the retirement-timing decision: employees receiving DC benefits are significantly more likely to retire before the normal retirement age than employees receiving DB benefits. Exploiting two sources of exogenous variation in the level of the DC benefit, we show that employees respond to within-year variation in their retirement incentives and, consistent with peer effects, that they respond more strongly to these incentives when more of their coworkers face similar incentives. Finally, consistent with the emerging literature on financial mistakes by households, we show that a small but significant fraction of retirees would benefit from shifting their retirements by as little as one month.

Suggested Citation

Chalmers, John and Johnson, Woodrow T. and Reuter, Jonathan, The Effect of Pension Design on Employer Costs and Employee Retirement Choices: Evidence from Oregon (November 2012). NBER Working Paper No. w18517. Available at SSRN: https://ssrn.com/abstract=2173618

John Chalmers (Contact Author)

University of Oregon ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-3337 (Phone)

Woodrow Johnson

U.S. Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC 20549-9360
United States
202-551-6611 (Phone)

HOME PAGE: http://www.sec.gov/about/economic.shtml

Jonathan Reuter

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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