Teacher Pension Incentives, Retirement Behavior, and Potential for Reform in Arkansas

Abstract

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.

Retirement Benefits and Teacher Retention: A Structural Modeling Approach

“…The results regarding the importance of pension wealth on retirement timing are mixed. Costrell and McGee (2010) apply a reduced-form regression framework to longitudinal administrative data on teachers in Arkansas to estimate the probability of retirement or separation in a given year as a function of pension wealth accrual, pension wealth, and earnings, controlling for age and service. They include two forward-looking pension wealth accrual measures, the one-year accrual rate and the "peak value," a measure of the financial option value of continued work intro-duced by Coile and Gruber (2007).…”

Education Research and Administrative Data

“…This particular question has been studied in Arkansas (Costrell and McGee, 2010), Illinois (Fitzpatrick and Lovenheim, 2014), Missouri (Koedel, Ni and Podgursky, 2014), Pennsylvania (Ferguson, Strauss and Vogt, 2006) and Washington (DeArmond and Goldhaber, 2010). Some other studies consider the role of incentives in improving teacher performance in Denver , Chicago (Jacob, 2013), Kentucky (Barrett and Toma, 2013), New York City (Fryer, 2013), Houston (Imberman and Lovenheim, 2015) and outside of the US in Israel (Lavy, 2009).…”

Early Retirement Incentives and Student Achievement

“…The growing literature on teacher retirement focuses largely on the role of the retirement incentives embedded in pension plans (Furgeson, Strauss and Vogt 2006;Costrell and Podgursky 2009;Costrell and McGee 2010;Brown and Laschever 2012;Brown 2013) and retirement's responsiveness to student performance and school demographics (Hanushek, Kain and Rivkin 2004;Mahler 2012). Though these studies provide clear evidence that teacher labor supply is responsive to pension incentive structures, how these retirement incentives affect student outcomes is unknown.…”