A new NBER working paper examines whether early retirement incentives work more effectively than eligibility milestones at getting employees to retire. (Photo: Shutterstock)
A new working paper from the National Bureau of Economic Research finds that public sector employees offered early retirement eligibility or early retirement buyouts are more likely to retire, without incurring any deficits in retirement wealth levels.
The paper “Retirement Choices by State and Local Public Sector Employees: The Role of Eligibility and Financial Incentives” looked at 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.
Defined benefit plans are expensive to close, even if a state or municipality wants to close its plan and switch over to defined contribution plans.
As a result, the study says, recent legislative actions focus on changes that affect new hires instead of existing employees, creating “defined benefit hybrids or combinations with defined contribution plans for new hires that may reduce plan generosity but still maintain the pattern of defined benefit financial influences on retirement,”
There's not a lot of research on the question of whether offering incentives to retire early actually affects retirement behavior, the study says.
But considering how underfunded many public pension plans are, it adds, “understanding the influences of plan generosity and eligibility requirements is critical for assessing plan solvency and evaluating the impact of these recent legislative changes.”
Older workers are eligible at different ages for taking pension income, getting certain health insurance, and obtaining Social Security benefits. The study looked at whether reaching the stage of becoming eligible for one of the three affected retirement decisions as much as early retirement incentives.
It found that while public employee retirement is responsive to program eligibility focal points, such as becoming eligible for the plan's early retirement benefit through age and years of service, there's no evidence that pension wealth or future pension incentives influence retirement separately.
The report adds that although the effects of such personal circumstances as poor health “have larger economic effects,” retirement can be encouraged by state and local governments, or school districts, by offering retiree health insurance and offering an early out package—or, conversely, encourage employee retention by eliminating retiree health insurance or by changing the age/service combination required.
It concludes in part that rather than rely on “plan generosity,” to influence employee retirement decisions and keep future pension costs in check, state governments might be better off tweaking plan eligibility rules and work on making the choice of early retirement an attractive one.
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Marlene Satter
Marlene Y. Satter has worked in and written about the financial industry for decades.
