Retirement choices by state and local public sector employees: the role of eligibility and financial incentives

Abstract

I analyze the effects of state public pension parameters on the retirement of public employees. Using a panel data set of public sector workers from 12 waves of the Health and Retirement Study, I model the probability of retirement as a function of pension wealth at early and normal retirement eligibility and Social Security coverage in the public sector job. I find that becoming eligible for early retirement, or receiving an early-out offer, significantly increases the probability of retiring. I do not find any effect of retirement wealth levels. These findings suggest that state legislative action to affect retirement decisions and reduce future pension costs would be most effective operating through plan eligibility rules and early-out incentives.

Underfunded Public Sector Pension Plans, Social Security Participation, and the Retirement Decisions of Public Employees

“…studies retirement behavior in Germany and eligibility for retirement in their Social Security system. Similar toPapke (2019), he finds that the framing of statutory ages as reference points for retirement explains the retirement pattern he sees in German administrative data.…”

“…Recall, the HRS sample consists of state and local public employees employed in the public sector at their baseline interview. As in Papke (2019)…”

“…In previous work (Papke 2019), I compare the relative strengths of retirement incentives from eligibility kink points in public defined benefit pensions and financial incentives from working longer. I use the Health and Retirement Study (HRS), which includes a large number of public employees across the most populous states, supplemented with individual-specific pension parameters, benefits, and the ages at which they become eligible for their plan's early and normal retirement pensions.…”