The authors analyze the Arkansas teacher pension plan and empirically gauge the behavioral response to incentives embedded in that plan and to possible reforms. The pattern of pension wealth accrual creates sharp incentives to work until eligible for early or normal retirement, often in one's early fifties, and to separate shortly thereafter. We estimate the effect of pension wealth accrual on teacher separation decisions using a new longitudinal data set of Arkansas teachers and find a significant impact. We then simulate the response to eliminating early retirement and raising the service requirement for normal retirement. We also simulate a shift to a constant accrual retirement plan. The response to both reforms is complex, as some would leave earlier and others stay longer. A constant accrual plan smoothes the pattern of retirement behavior as individuals tailor decisions to their own preferences instead of those built into the pension formula.
The value of pension benefits varies widely, by a teacher's age of entry and exit. This variation is masked by the uniform rate of annual contributions, as a percent of pay, to fund benefits for all. For the first time, we unmask that variation by calculating annual costs at the individual level. In California, we find that the value of a teacher's benefits ranges from about 4 to 22 percent of pay, and exhibits some idiosyncratic patterns, as is endemic to traditional pension plans. The variation in individual cost rates generates an extensive but hidden array of cross-subsidies, as winners receive benefits worth more than the uniform contribution rate, and losers receive less. Almost two thirds of all entering teachers, past and present, are losers in California. By contrast, a prominently invoked study finds that nearly all active teachers are winners there. That result is shown to be highly skewed by excluding the losses of prior entrants who left early, thereby violating the funding fact that the gains and losses of winners and losers must offset each other. Our main policy conclusion is that cash balance plans can rationalize or eliminate the current system of cross-subsidies and provide the transparency lacking in traditional plans.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.