How Much Do Public Employees Value Defined Benefit versus Defined Contribution Retirement Benefits?

68 Pages Posted: 28 Dec 2022 Last revised: 24 Jun 2023

See all articles by Oliver Giesecke

Oliver Giesecke

Stanford University - Hoover Institution

Joshua D. Rauh

Stanford Graduate School of Business; Hoover Institution; National Bureau of Economic Research (NBER)

Date Written: December 21, 2022

Abstract

We survey public employees across the United States about their preferences regarding retirement plan options, and in particular at what employer contribution rate public employees would agree to switch to a defined contribution (DC) plan on a forward-looking basis. Overall, 89.2% of respondents are willing to accept a hard freeze of their defined benefit (DB) plan and the introduction of a DC plan at some contribution level. Conditional on acceptance, the median minimum contribution rate that respondents would require---if no additional retirement benefits would accumulate under their existing plan---is 10% of payroll, while the mean is 18.2% of payroll. The perceived and actual financial generosity of the pension plan relates negatively to the acceptance rate and positively to the minimum required contribution. More senior employees are somewhat less likely to accept the DC option, but there is over 80% acceptance even among long-tenured employees. Consistent with typical DB accrual patterns in the presence of early retirement options, employees with around 20 years of service require the largest DC contributions to switch. Employees who perceive the financial stability of their current plan as weaker are, on average, more likely to accept a DC plan and at lower contribution levels. We find no statistically significant heterogeneity with respect to educational attainment or financial literacy, making an explanation of the results based on cognitive ability less likely. In comparison to the economic cost of prevailing DB plans, introducing DC options that are acceptable to employees could potentially improve the sustainability of pension systems across the United States without compromising employees' satisfaction with their pension plan options.

Suggested Citation

Giesecke, Oliver and Rauh, Joshua D., How Much Do Public Employees Value Defined Benefit versus Defined Contribution Retirement Benefits? (December 21, 2022). Stanford University Graduate School of Business Research Paper No. 4308471, Available at SSRN: https://ssrn.com/abstract=4308471 or http://dx.doi.org/10.2139/ssrn.4308471

Oliver Giesecke (Contact Author)

Stanford University - Hoover Institution ( email )

Stanford, CA 94305
United States

Joshua D. Rauh

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Hoover Institution ( email )

Stanford, CA 94305-6010
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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