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

• Activity Number: 579
• Type: Topic Contributed
• Date/Time: Wednesday, August 4, 2010 : 2:00 PM to 3:50 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Robert M. Costrell+ and Josh McGee*+
• Companies: University of Arkansas and University of Arkansas
• Keywords: pension ; teacher retirement ; defined benefit ; cash balance ; peak value ; probit

Abstract

In this paper we present an empirical investigation of the behavioral response to the Arkansas teacher pension plan, as well as to a possible reform plan. We examine the plan parameters and the sharp incentives these parameters create to work until service eligibility requirements are met, often in one's early fifties, and to separate shortly thereafter. We then estimate the effect of pension wealth accrual on teacher separation decisions using a new longitudinal dataset of Arkansas teachers. The resulting coefficients are subsequently used to compare predicted separation probabilities under the current regime versus a constant accrual retirement plan. We find evidence that teachers' retirement decisions are sensitive to pension wealth accrual. Our simulations suggest that a constant accrual plan could notably smooth the pattern of retirement behavior from that currently observed.